US OCC Extends Climate Risk Survey

On January 18, 2022, the Office of the Comptroller of the Currency (“OCC”) announced the renewal of a survey on climate risk management practices at larger OCC-regulated banks (“Climate Survey”).¹ This announcement may have come as a surprise for those who were not aware of the existence of the Climate Survey as the survey is one of the lesser discussed parts of the agency’s initiative to address the effects of climate change.

The due date for the first iteration of the Climate Survey was December 6, 2021, and banks were not required to respond to the Climate Survey unless contacted by the OCC. Based on the January 18 extension, the OCC may be continuing to collect information related to the Climate Survey or may have extended the information collection authorization for other reasons. Regardless, banks should consider reviewing the Climate Survey to better understand the path that the agency expects them to follow when developing climate risk management practices.

In this Legal Update, we provide background on the OCC’s climate risk management initiative and discuss the Climate Survey.

Background

As we explained in a previous Legal Update, over the past three decades, US financial regulators have adopted a series of operational and governance standards for insured depository institutions, including specialized standards for safety and soundness at larger federally chartered banks,² which the OCC is seeking to update to include climate change risks.

In November 2021, the acting head of the OCC issued a call to action on climate change to the boards of directors of OCC-regulated banks.³ Specifically, he outlined an initial series of climate change-related questions that boards should be asking bank management and stated that bank boards should use the exercise to help improve and build up climate risk management and reporting capabilities. He also indicated that the OCC would conduct a “range-of-practices review” as part of developing supervisory expectations for climate risk management. The Climate Survey discussed here is that review.

Climate Survey

The Climate Survey is a series of 17 questions, most of which include multiple choice responses and all of which request follow-up comments and supplementary documents (e.g., org charts, climate risk management policies, climate risk appetite statements/frameworks, climate risk plans). Please see the appendix to this Legal Update for a list of the questions in the Climate Survey.

The preamble to the Climate Survey indicates that it was sent to banks through the OCC’s BankNet system. The recipients are not identified, but other filings made by the OCC indicate that approximately 20 larger OCC-regulated banks received the survey. While banks were not required to draft new materials to submit with their responses, the OCC estimated that it would take each bank 170 hours to draft those responses.

The multiple choice answers to questions 1, 2, 3, 4, 5, 6, 7, 10, and 12 are framed as a continuum that allows banks to indicate whether they are in the early stages of developing climate risk management practices or have efforts that are more developed (they also include a catch-all answer of “other”). For example, question 10 addresses climate scenario analysis and asks whether the bank has developed, is working on, has plans to work on or has no plans to work on climate scenario analysis.

Question 11 is notable in that it implies banks should be considering adopting voluntary frameworks for disclosing climate-related information. It lists the following as some of the frameworks that banks may choose to adopt and asks for examples of disclosures that banks have created.

1. TCFD – the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures
2. SASB – the Sustainability Accounting Standards Board
3. GRI – the Global Reporting Initiative
4. PCAF – the Partnership for Carbon Accounting Financials
5. GHG Protocol – the Greenhouse Gas Protocol
6. CDP – the Carbon Disclosure Project

Question 12 is notable in that it implies banks should eventually consider climate risks in credit decisions and when pricing financial products. While the regulators have gone to lengths to emphasize that they will not use climate risk management to restrict banks from lending to specific industries, there remain concerns that this will be the consequence of incorporating climate risk as an explicit factor in credit decisions.⁴ Further, it is not clear whether requiring banks to incorporate climate risks into credit underwriting will drive certain borrowers to nonbank lenders, as has happened with the supervisory prohibition against banks making LIBOR-based loans.⁵ It also stands in contrast to Question 16, which asks banks for the strategy that they are using to mitigate the impact of climate risk management activities on consumers’ and vulnerable communities’ access to financial services.

Takeaways

Assuming that most banks requested confidential treatment for their responses, it is unlikely that the OCC will publicly release the responses to the Climate Survey. However, we expect that the OCC is carefully considering the responses as it develops a risk management framework for climate-related financial risks. And we expect to see the results in the form of supervisory guidance that will be issued throughout 2022.

We do not know if the OCC plans to request updated responses to the Climate Survey, but if it does, we expect it to look for banks to have made progress in developing climate risk management capabilities. For example, if a bank initially responded that it was developing climate risk metrics, the OCC might look to it to provide samples of the climate risk reports in response to future surveys. Also, while the results will not be used to assess the adequacy of bank climate risk management practices, examiners might use the results of the Climate Survey to guide and focus their own assessments of bank practices.

Banks should consider reviewing the Climate Survey even if they were not required to complete it as it provides useful insights into regulatory expectations on climate risk management. Among other points, it outlines the stages the OCC apparently expects banks to progress through as they develop climate risk management practices. Further, it identifies the key items that the OCC expects to see as part of those risk management practices (e.g., training, scenario analysis). These are useful markers for banks to understand as they rapidly build out risk management capabilities in this area.

To discuss any of the issues raised in this Legal Update, please reach out to any of the authors listed above or your Mayer Brown contact.

Appendix: Questions

1. What is the current maturity of the bank’s climate risk management framework and program?
2. What best describes the bank’s current governance structure that is responsible for management of climate-related financial risks at the bank?
3. What best describes the bank’s plans for a governance structure, in the next 1-3 years, that addresses climate-related financial risks at the bank?
4. Does the bank’s second line of defense currently have processes to oversee climate-related financial risks?
5. How would you characterize the work to date by internal audit on climate risk management?
6. Has the bank developed risk appetite statements or risk appetite metrics?
7. Are data and risk measurement metrics to estimate the bank’s exposure to climate-related financial risks provided to senior management and the Board?
8. Who has received training within the bank on climate risk management?
9. Please describe any climate-related commitments the bank has made (e.g., net-zero emissions) and associated dates below and upload any related documentation to BankNet.
10. How is the bank currently using scenario analysis to measure climate-related financial risks?
11. There are a number of voluntary climate-related reporting frameworks. Please identify and provide recent examples of the disclosure framework used for the banks own reporting.
12. Does the bank currently include climate-related financial risks and analysis in credit decisions and the pricing of financial products?
13. Does the bank have plans to offer new financial products or services related to sustainable finance or climate change over the next 12 months?
14. What are the short-term (1-2 years) challenges for the bank in identifying, measuring, and managing climate-related financial risks?
15. What are the long-term challenges (2-5 years) for the bank in identifying, measuring, and managing climate-related financial risks?
16. Please describe any challenges that OCC-supervised institutions face as they seek to manage climate-related financial risks while also meeting the credit and financial services needs of consumers and communities?
17. Briefly discuss any other challenges with respect to the development and execution of a climate risk management framework that are within the OCC’s purview to address. Please upload any related documentation to BankNet.

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¹ 87 Fed. Reg. 2667 (Jan. 18, 2022), https://www.federalregister.gov/public-inspection/2022-00843/agency-information-collection-activities-proposals-submissions-and-approvals-climate-risk-range-of. The OCC regulates national banks, federal savings associations, and federal branches and agencies of foreign banking organizations.

² 12 C.F.R. pt. 30, app. D.

³ OCC, NR 2021-116 (Nov. 8, 2021).

⁴ E.g., Brainard: Fed Will Not Tell Banks to Restrict Lending to Oil and Gas Firms, ABA Banking Journal (Jan. 13, 2022).

⁵ E.g., Lara Wieczezynski, Libor Is Staying Alive for Some New U.S. Leveraged Loan Deals, Bloomberg Law (Jan. 10, 2022).