Dive Brief:

• New York's Department of Financial Services (NYDFS), in a letter Thursday, called on state-regulated financial institutions to integrate climate change-related financial risks into their business strategies, risk management processes and governance frameworks — becoming the first U.S. regulator to explicitly make that request.
• The agency suggests regulated organizations designate a board member or committee, as well as a senior management function, to be accountable for the institution's assessment and management of climate change-related risks to credit, liquidity, reputation, operations, strategy and the market at large.
• The regulator said it recognizes climate change affects institutions to different degrees, and appreciates not every organization has the same level of resources. But each institution "should take a proportionate approach that reflects its exposure to the financial risks from climate change and the nature, scale, and complexity of its business."

Dive Insight:

NYDFS stopped short of demanding climate-related stress tests — it merely commended organizations that conduct them internally. The notion of climate stress tests has gained traction over the past years, as countries such as the U.K. and the Netherlands have instituted them. Sen. Brian Schatz, D-HI, introduced a bill last November that would force the Federal Reserve to conduct stress tests every two years to measure large banks' ability to weather climate change-related financial risks.

Likewise, the New York regulator applauded organizations that have joined international networks that assess and disclose the greenhouse gas emissions associated with their loans and investments. For example, in July Morgan Stanley, Citi and Bank of America became the first large U.S. banks to join the Partnership for Carbon Accounting Financials (PCAF), Dutch consortium that, at that point, counted 70 members accounting for more than $9 trillion in assets.

NYDFS suggested its regulated organizations engage with established climate-focused networks such as the Task Force for Climate-related Financial Disclosures when developing their approach to measuring and disclosing climate-related financial risks.

"By working with the industry and engaging in a dialogue on this serious issue, we are creating a road map for a more sustainable future," Linda Lacewell, New York's superintendent of financial services, said Thursday in a press release.

NYDFS isn't asking banks to do anything it wouldn't do itself. It noted it joined the Network for Greening the Financial System, a group of central bankers and supervisors committed to managing climate change's financial risks. The regulator also hired its first director of sustainability and climate initiatives.

Nationwide regulators, too, have laid out suggestions meant to urge companies to take more responsibility for their climate impact. A Commodity Futures Trading Commission (CFTC) subcommittee wrote a report last month espousing that forcing businesses to pay for their greenhouse gas emissions would be the most efficient way to ensure financial markets reduce climate risk. The report was approved by two dozen businesses, including Citi, Morgan Stanley and JPMorgan Chase.

NYDFS cited the CFTC panel's report in calling attention to the increased risk of flooding as climate change accelerates.

"Regional and community banks ... are more vulnerable to regionally concentrated physical risk, including to sudden extreme events," the regulator wrote. "These banks' property loans tend to be more geographically concentrated than the loans of larger banks. In addition, CRE [commercial real estate] loans constitute a much larger share — nearly a third — of the loan books of small banks."

And, much as in the CFTC report, NYDFS warned of transition risks — the potential for stranded assets amid the shift away from, particularly, fossil fuels, and the related cost of replacing infrastructure.

Although some of the impact of climate change is seen as inevitable, it appears NYDFS is laying out its intentions before focus on the issue becomes a crisis point. "As the global public health pandemic of COVID-19 has made clear, preparation is key to addressing systemic risks," Lacewell wrote. "By the time a crisis occurs, it is simply too late."