New Climate-Related Guidance for the Banking Industry

Physical Climate Risk Factors Increasingly Need to Be Known, Managed, and Reported

New regulations regarding physical climate risk reporting are emerging across the globe and affect all sectors of the economy, including banking. From the new Securities and Exchange Commission (SEC)-proposed changes for the United States, to the European Sustainability Reporting Standards (ESRS) across the EU, to the Task Force on Climate-Related Financial Disclosures (TCFD) guidelines globally, climate-related regulations and guidance are rapidly changing; keeping up with necessary reporting is essential for banking institutions. Additionally, states across the U.S., including California and New York, have newer regulations and laws that affect institutions doing business in those states. Across these regulations, materiality and double materiality are fundamental in developing and adhering to emerging laws and guidelines.

By taking steps to address climate-related risks before regulations are fully implemented, banks can both ensure compliance and manage financial risks while positioning themselves for success in a changing market.

SEC-Proposed Changes for the United States

The SEC has proposed a final rule for U.S. public companies to report climate-related impacts on their businesses.

Similar to financial statements and the EU Corporate Sustainability Reporting Directive (CSRD), companies will need to XBRL (eXtensible Business Reporting Language)-tag their data, which is the process of assigning tags to each item of data in a document in preparation for financial reporting, in addition to disclosing:

• Scope 1 and Scope 2 greenhouse gas (GHG) emissions, subject to assurance requirements that will be phased in
• Governance and oversight of material climate-related risks (including board oversight)
• Activities or plans to mitigate or adapt to material climate-related risks, such as scenario analyses or transition plans
• Risk management processes for material climate-related risks
• Material climate targets and goals
• Financial statement impacts and material impacts on their financial estimates and assumptions due to severe weather events and other natural conditions (e.g., hurricanes, tornadoes, floods, drought, wildfires, extreme temperatures, and sea level rise)
• A roll forward of carbon offsets and renewable energy credits or certificates (RECs) in the notes to the financial statements if carbon offsets and RECs are a material component of meeting climate-related targets and goals

As far as timing, the SEC proposed that, in 2025, large accelerated filers with $700 million or more public float will begin their disclosures. In 2026, accelerated filers with between $75 million and $700 million public float will begin adapting to the proposed disclosures. And in 2027, non-accelerated filers (generally new IPOs), smaller reporting companies under $250 million public float and/or under $100 million in annual revenue, and emerging growth companies with less than $1.07 billion revenue and no public float will begin to adapt to these SEC-proposed disclosures.

TCFD Provides Guidelines on Reporting Climate Risk for the Banking Sector

The TCFD — established in December 2015 by the Group of 20 (G20) and the Financial Stability Board (FSB) — has made recommendations that the banking industry has widely adopted across jurisdictions. They are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings. In the TCFD framework, there are four thematic areas that represent the core elements of how organizations operate:

• Governance: The organization’s governance around climate-related risks and opportunities 
• Strategy: The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning 
• Risk Management: The processes used by the organization to identify, assess, and manage climate-related risks
• Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities

Canada Releases Regulations for Banks and Insurance Institutions

The Office of the Superintendent of Financial Institutions (OSFI), Canada’s financial regulator, has released new guidelines on climate-related risk management to begin reporting for fiscal year 2024. These disclosures are closely aligned with the TCFD framework, which covers disclosure categories including governance, strategy, risk management, and metrics and targets. The disclosure requirements also include reporting Scope 1, 2, and 3 GHG emissions and are required to maintain sufficient capital and liquidity buffers for climate-related risks.

Principles for Climate-Related Financial Risk Management for Large Financial Institutions

Three agencies jointly issued principles that provide a high-level framework for the responsible management of exposures to climate-related financial risks. The agencies are the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, and the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC). The guidance encompasses six areas: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis. These principles aim to equip bank management with the tools to effectively assess and incorporate climate risks into their risk management frameworks.

New Regulations Emerge for Financial Institutions in New York

The New York Department of Financial Services (NYDFS), the primary regulator for many financial institutions that do business in New York (including New York-based institutions), has put out guidance throughout three themes to manage climate risk: physical and transition risk channels; the centrality of operational resilience to safety and soundness; and ensuring compliance with all applicable consumer-protection considerations (including fair lending) in adapting the risk management frameworks to account for material climate-related financial and operational risk.

These guidelines and requirements for New York State-regulated banking and mortgage institutions help them manage their material financial and operational risks associated with climate change. NYDFS provides them with a balanced, data-driven approach to preserve responsible operations and resiliency by addressing the risks posed by climate change.

SB 261 Introduces Regulations for California Institutions

The State of California Bill 261 (SB 261), also called the Greenhouse Gases: Climate-Related Financial Risk Act, will require both public and private businesses doing business in California with more than $500 million in annual revenues to disclose climate-related financial risks and the measures they have adopted to mitigate those risks. These businesses must prepare reports following the TCFD framework, with the first disclosures due in 2026. The goal is to effectively disclose a company’s climate-related financial opportunities and risks in a standardized format and is estimated to affect 10,000 businesses.

ESRS Introduces Mandatory Reporting Standards Across the EU

The European Sustainability Reporting Standards (ESRS) are reporting standards for sustainability within the EU. They are an integral part of the Corporate Sustainability Reporting Directive (CSRD) of the European Parliament and the Council, making them mandatory. They take a “double materiality” perspective — encouraging companies to both look inward at their own interests and outwards at societal and planetary impacts. This serves to make companies responsible for reporting on their impacts on people and the environment as well as the social and environmental issues that create financial risks and opportunities for the company. 

Included in the ESRS are ESRS 1, or general requirements, and ESRS 2, or general disclosures. ESRS 1 sets general principles to be applied when reporting according to ESRS and does not set specific disclosure requirements. ESRS 2, however, specifies crucial information to be disclosed irrespective of which sustainability-related matter is being considered. All the other ESRS standards and individual disclosure requirements are subject to a materiality assessment.

Why Evaluating Physical Climate Risks Is Important to Companies

In light of the regulations described above, how is physical climate risk defined? Physical climate risk refers to the direct and potentially adverse impacts of climate change, such as extreme weather events, rising sea levels, and temperature shifts. This risk category encourages the recognition that a company’s well-being is intertwined with the health of the planet and society, and that a holistic view of these factors is vital. 

For those in the banking industry in particular, climate risk factors can have these financial impacts:

• Loan Defaults: Extreme weather events and other climate disruptions can make it harder for borrowers to repay loans; this can lead to significant financial losses for banks
• Property Damage: Banks themselves can also suffer physical damage from climate events, impacting their infrastructure and operations; rising sea levels and flooding pose a particular threat to coastal properties
• Business Disruption: Climate change can disrupt critical infrastructure and supply chains, impacting businesses across sectors; banks that lend heavily to vulnerable industries could face cascading risks

Banking institutions need to consider not only their own climate-related concerns but also how they affect their customers in these areas:

• Creditworthiness: Understanding a borrower's vulnerability to climate change helps assess their long-term creditworthiness
• Collateral Valuation: Climate change can impact the value of collateral that backs loans; banks need to understand how climate risks could affect the value of their loan portfolio
• Risk Diversification: Banks can diversify their loan portfolios to minimize their exposure to climate-vulnerable regions or industries
• Sustainable Lending: Banks can develop loan products and services that encourage climate-resilient practices among their customers

Materiality, Double Materiality, and Why It Matters

Materiality is a fundamental concept in sustainability reporting that focuses on financial aspects that influence economic decisions, primarily addressing the needs of investors. However, that basic definition has evolved, and companies now consider not only financial factors but certain non-financial aspects as potentially material to their business performance.  

Enter double materiality. As briefly mentioned earlier, this is a concept where companies are encouraged to consider both internal and external interests — external referring to society and the physical environment — when reporting on sustainability matters. “Inside-out” refers to companies assessing how their activities impact people and the planet; this includes understanding their role in resource consumption, emissions, and social well-being. “Outside-in,” on the other hand, refers to evaluation of how sustainability issues, such as climate change, affect the business. This perspective considers risks and opportunities arising from external factors like physical climate risk.

By embracing double materiality, companies must consider how their operations are affected by potential scenarios like infrastructure damage and supply chain disruptions, as well as how their actions impact resources and people — for example, water availability and community resilience — that they rely on. When contending with emerging regulations and guidelines, keeping materiality and double materiality front of mind is imperative for adopting these frameworks as well as staying one step ahead of regulations.

Embrace New and Emerging Regulations

Incorporating climate risk data into risk evaluations is integral to adhering to new and emerging regulations and guidelines. D&B Climate Risk Insights provides climate risk data that aligns with TCFD guidelines and can help support physical climate risk reporting requirements. It uses Big Query to gain a better understanding of acute physical climate risks, including near-term risks arising from perils such as floods, wildfires, droughts, or extreme temperatures — and chronic, longer-term physical climate risks arising from evolving climate conditions, including rising temperatures, sea-level rise, or changing weather patterns.