Climate-focused financial regulation is coming to US banks

With the Biden administration set to take a leadership role in combating climate change and US financial regulators showing a newfound willingness to regulate climate risk, regulation of climate risk is coming to the US banking sector. Here’s what banks should do now.

Fully understand the risk

Banks should come to better understand the full range of physical and transition climate risks to which they may be exposed. A recent report from the Ceres Accelerator for Sustainable Capital Markets found U.S. banks are far more exposed to these transition risks than they’re currently disclosing -- and that their exposure could lead to destabilizing losses across the banking system if they don’t plan better for this transition. 

Understanding the systemic nature of climate risk is integral to assessing how much exposure a bank has and what moves it needs to take to mitigate that risk. 

Assess and disclose

We’re likely to see new financial regulation of climate risk in the U.S., but even without it, banks should assess and disclose their full exposure. Disclosure makes for more efficient markets, more resilient banks, and a more sustainable banking system. 

Effective disclosure means quantifying climate risk at both the firm and portfolio levels across all asset classes and business lines. And all banks should aim for disclosure that assesses the entire lending portfolio, including both historical emissions and forward-looking indicators of future performance, such as capital spend. 

Engage clients to mitigate risk

Equipped with a new understanding of what climate risk exposure means in the banking world, banks can start to work to mitigate those threats. They can start by leveraging their lending power to make sure their borrowers disclose their own emissions and lay out their plans for business in a significantly carbon-constrained world. By leaning on the companies in their portfolios to disclose their climate risk, banks can begin to get the full picture of their own exposure, which they can use to mitigate that risk by lending to companies well-positioned for long-term success and parting ways with those stuck in a carbon-intensive past. 

Set targets

With or without regulation prodding them along, banks should work to reduce their exposure to climate risk -- and measure the success of that work against concrete emissions reduction commitments that have detailed targets and specific timelines. Several US banks are starting to move in this direction, but we need more banks setting more ambitious goals.

Banks are both particularly vulnerable to climate change and particularly powerful to fight it. By leaning into this work, they can distinguish themselves from their peers and ensure investors, customers, and regulators that they are clear-eyed and proactive about the financial risk that climate change poses for themselves and for our economic system more broadly.

This article was contributed by Steven M. Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets, and Dan Saccard, Senior Director of the Company Network, Ceres