Climate change

The issues associated with environmental, social and governance policies cut across all the traditional concepts of risk facing bank executives and will endure for years.

All public companies could be on the hook for detailing climate-related risks — including those of clients. The data-gathering burden might be especially heavy for banks, industry officials say, because they lend to and invest in so many companies across so many industries.

Sixty-one percent of executives at large U.S. banks said their institution would be prepared to comply with the kind of testing now happening in the U.K., according to a new survey. But experts question whether bankers are underestimating the data-gathering challenges ahead.

The huge buffers that banks built up over the pandemic are protecting the financial system from looming threats, regulators told President Biden during a meeting that also touched on climate change, extension of credit to the underserved and other topics.

The largest financial institutions say the agency’s proposal to require public companies to disclose their contributions and vulnerability to climate change is consistent with investor demand. Community banks say it would create an unnecessary regulatory burden.

Mark Carney, a onetime Bank of England governor, argued that banks should not cut ties with polluting businesses, but rather work with clients to help them minimize their impact on the environment.

Amid GOP criticism about the Federal Reserve’s focus on climate change issues, Chair Jerome Powell said the central bank is striking the right balance by educating the public about risks to the financial system while not taking actions he says are better left to elected officials.

While the industry is facing greater pressure to scrutinize the environmental risks associated with its financing activities, many banks also sense opportunities in climate change. Here are some examples.

Despite concerns about the scope of information that companies would have to provide about risks linked to climate change, some of the largest institutions are seeking to collaborate with the agency as it develops a framework for informing investors.

The White House directive may lead regulators to develop new mortgage underwriting standards, stress-test requirements and flood insurance policy, observers said.

In an executive order signed Thursday, the president is asking the Financial Stability Oversight Council to create a strategy for quantify the risks global warming pose to financial stability.

During a House Financial Services Committee hearing, Democrats largely praised the policy decisions of acting regulators named by the Biden administration and knocked their predecessors. But Republicans warned that moves to reverse Trump-era policies would leave financial institutions without a clear road map.

Setting a tougher tone than Trump-era regulators, acting Comptroller of the Currency Michael Hsu warned against excessive risk-taking during the economic recovery and called for better interagency coordination on fintech standards.

After much anticipation, the Federal Reserve last year finally joined the Network for Greening the Financial System, which develops regulatory best practices for combating climate risks. But all U.S. banking regulators must participate for the effort to succeed, some observers argue.

Regulators around the world are exploring how to assess banks' exposures to climate change risks. But they'll have to tackle legal, economic and modeling problems that don’t have obvious solutions.

The greenhouse gas emissions associated with financial institutions’ investing, lending and underwriting activities are more than 700 times higher, on average, than their direct emissions, a report concludes.

Accounts payable is one of the most paper-intensive business functions, with lots of room for more environmentally sound processing, Daniel Ball of Medius says.

Morgan Stanley was also among 43 banks worldwide to sign on as initial members of the Net-Zero Banking Alliance. Convened by the United Nations, the group has pledged to help clients in carbon-intensive industries — including transportation, mining and agriculture — reduce their reliance on fossil fuels.

House and Senate GOP members have stepped up criticism of a plan to include banks in a global push to cut emissions, saying it could cut off financial services access for energy and fossil fuel companies.

JPMorgan Chase set a goal to finance $2.5 trillion in initiatives that combat climate change and advance sustainable development over the next 10 years, while Citigroup said it would back $1 trillion of similar efforts by 2030.