In a speech by Acting Comptroller of the Currency Michael J. Hsu at the Office of the Comptroller of the Currency (OCC) Headquarters on November 8, 2021, Hsu discussed the critical role that large bank boards of directors play in addressing climate change and posed five questions that every bank board should ask in an effort to improve climate risk management and reporting practices at their banks. Hsu also announced OCC’s plans to issue framework guidance on climate risk management by the end of the year and detailed guidance issued next year for each risk area.
The first question, considered by Hsu to be the core question of climate risk management, was “What is our overall exposure to climate change?” Hsu urged bank executives to develop and conduct scenario-based analysis of its portfolio to determine material vulnerabilities that may result from an extreme weather event, the costs of which have exceeded $690 billion over the last five years. Hsu felt that by developing an understanding of the bank’s exposure to climate-related risks, bank executives would be compelled to develop frameworks, compile data, and implement systems to manage climate-change risks.
The second question that Hsu posed was “Which counterparties, sectors, or locales warrant our heightened attention and focus?” Hsu suggested that banks should determine both the physical risks and transition risks (risks that relate to the adjustment to a low-carbon economy) that may affect the creditworthiness and solvency of certain borrowers and sectors that may become permanently damaged as extreme weather events increase in frequency, severity and scope.
Third, Hsu suggested that banks ask “How exposed are we to a carbon tax?” While Hsu felt the likelihood of the US adopting a carbon tax in the foreseeable future was low, it does put a price on carbon dioxide and other greenhouse gas emissions that, if a tax were imposed, would force private businesses and governments to reduce their production. The exercise of determining the most significant low-carbon exposures would force bank boards to hone their transition risk measurement practices and provide better risk assessments in the future.
The fourth question that Hsu posed was “How vulnerable are our data centers and other critical services to extreme weather?” Hsu suggested that banks should assess the vulnerability of all third-party critical service providers and data centers to climate change-related risks, and urged banks to develop business continuity plans in case an extreme weather event limited access to critical bank locales and operations.
The fifth and final question posed was “What can we do to position ourselves to seize opportunities from climate change?” Hsu suggested that, in addition to climate-change related risks, banks should look for opportunities that may arise from a low-carbon economy, such as renewables, carbon capture, electric vehicles and charging stations. Hsu also proposed that changes in agriculture, water infrastructure, consumer preferences and investor sentiment would create new banking opportunities.
OCC News Release | Acting OCC Michael Hsu’s November 8, 2021 Speech