The Independent Community Bankers of America wants the Federal Reserve Board to exempt mid-size and small banks from climate change risk management policies being established for large banks.
The drafted policies, which propose that banks respond by strengthening their governance, strategic planning, risk management oversight and data reporting practices, are similar to those developed by the Office of the Comptroller of the Currency, FDIC and the Basel Committee on Banking Supervision.
In a Feb. 6 letter, ICBA Regulatory Counsel Jenna Burke said the proposal would likely exclude institutions operating legally (but with politically unpopular environmental policies) from the banking system. Community banks cannot afford expensive analysis for future climate change scenarios, she said, especially on top of current spending to keep their existing systems up to date. According to the ICBA, regulators did not commission an independent review proving the risk that climate change poses to the financial industry.
“Community banks should never be subject to climate-related financial risk management frameworks, as these requirements are unnecessary, costly and duplicative to the risk management practices they currently, and capably, implement,” Burke said. “And critically, because community banks are deeply invested in their communities, these small institutions cannot and should not be expected to minimize concentrations in their loan portfolios or abandon loan customers in response to remote, subjective and speculative climate risk.”
The American Bankers Association said it supports the draft “as a high-level guide for the largest institutions,” but called on the FDIC, OCC and Federal Reserve Board to work together “to clarify and make consistent the definitions of key terms and concepts.”
“We urge the Federal Reserve, together with the FDIC and OCC, to seek early and frequent public input when developing standards through international bodies,” the ABA said. “Once finalized, internationally developed guidance and standards, such as the Basel Committee on Banking Supervision Principles, may alter the provision of financial services to certain industries and communities. The economic effects of this will be felt by all banks.”
Regulators under the Biden administration have pushed for banks to adopt stricter climate change risk policies. The move comes amid increased pressure over environmental and social governance-related regulatory proceedings, according to law firm Norton Rose Fulbright’s 2022 annual survey of more than 430 general counsel and in-house litigation leaders. In the report, 28 percent said their exposure to ESG litigation increased last year, and 24 percent expect to become even more exposed in 2023.
ESG matters ranked only behind cybersecurity matters as the top area of concern for financial services companies, noted William Troutman, a Los Angeles-based partner at Norton Rose Fulbright. Banks are experiencing more generalized climate-change risk, both as lenders more closely scrutinize loans to customers in areas prone to the impacts of climate change and as anti-ESG measures pass in state legislatures.
According to Bloomberg Law, Republicans in several statehouses want to limit access to state contracts and pension funds for businesses with ESG policies with which they disagree. Bills in several Republican-led states would only authorize state government contracts for companies that don’t discriminate against or boycott industries such as oil and gas or firearms. A group of Republican-led states have filed a lawsuit in response to a proposed Department of Labor rule that would allow 401(k) managers to direct their clients’ money to preferred ESG investments.
Regardless of the political pushback, Troutman said banks that decide to focus on ESG issues do so to ensure their long-term viability and in response to consumer demand, not based on altruism.