U.S.: Treasury Department's Financial Stability Oversight Council Establishes Climate Risk Committee
On October 3, 2022, the Financial Stability Oversight Council (the "FSOC") – the U.S. federal government body authorized to identify and monitor excessive risks to the U.S. financial system – announced the launch of the Climate-related Financial Risk Advisory Committee ("CFRAC"). The CFRAC is tasked with assisting the FSOC in identifying, assessing and mitigating climate-related financial risks. Specifically, the CFRAC will gather and identify gaps in climate-related data and analyze climate-related risks to the financial system through engagement with a broad range of stakeholders.
The new committee will be formed by members from outside government who will use their private-sector expertise to work with the FSOC and its members to improve their understanding of how climate change may affect the financial sector. The launch of the CFRAC builds on work already being done by FSOC members to assess climate-related financial risks, such as the Office of the Comptroller of the Currency's formation of the Climate Risk Implementation Committee.
The establishment of the CFRAC follows the formation of the Climate-related Financial Risk Committee (the "CFRC") by the FSOC last year. Whereas the CFRC coordinates the activities of financial regulators across FSOC member agencies, the CFRAC is intended to provide an external perspective by gathering data in collaboration with a wider number of stakeholders, such financial institutions, climate scientists and think tanks, to help inform climate-policy initiatives.
U.S.: Federal Reserve Board Announces Pilot Climate-Scenario Analysis
On September 29, 2022, the Federal Reserve System's Board of Governors (the "Board") announced a pilot exercise to assess climate-related financial risks. The year-long program is set to be launched at the beginning of 2023 and will involve six large U.S. banks, namely, Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.
At the start of the program, the Board will publish information about the climate, economic and financial variables involved in the various climate scenarios. The chosen variables will be designed to "enhance the ability of supervisors and firms to measure and manage climate-related financial risks." While no identifying information will be released about the performance of specific banks, the Board expects to publish its learnings about climate-risk management practices and insights gathered about potential risks identified during the exercise.
Importantly, the results of this exercise will have no capital or supervisory consequences for the banks involved. The Board has made clear that the climate scenario analysis is meant to be "exploratory in nature," with the goal of improving understanding of how climate-related financial risks may manifest and differ from historical experience. Further information on how the exercise will be conducted and the scenarios that will be used in the pilot is expected in the coming months.
Asia: ASIFMA Publishes Additional Labor Practice Guidance for Investors and Investee Companies in Asia
Last month, the Asia Security Industry & Financial Markets Association ("ASIFMA")—an independent Asian regional trade association with 165 members across the financial services industry—published follow-up guidance for ESG investors on labor practices and their effect on companies in Asia.
The report highlights that complying with human rights best practices, such as strengthening supply-chain resiliency and reducing reputational risks, correlates with significant commercial benefits to businesses. Conversely, objectionable labor practices can result in operation bans, loss of business, regulatory penalties and reputational damage.
ASIFMA recommends that investors and investee companies engage on the topic of labor practices in order to effectively identify, remediate and prevent labor concerns. This would enable investors to better assess the investee company's ability to anticipate, monitor, respond to and remediate any such issues. The guidance suggests applying a TCFD-inspired approach to labor risk management, which would cover the core TCFD elements of Governance, Strategy, Risk Management and Metrics and Targets.
The report highlights examples of good practices in addressing labor issues. For instance, when approaching the management and governance of responsible sourcing and general supply chain management, investors should consider whether the target company:
- adheres to global standards, such as the International Labour Organization ("ILO") labor standards, the United Nations Universal Declaration of Human Rights and the United Nations Guiding Principles on Business and Human Rights;
- refers to ILO indicators of forced labor;
- produces a labor-practice statement;
- discloses how labor practices are discussed at board level and board member expertise in human rights; and
- adopts human rights due diligence, supplier audits, supplier training and engagement and grievance mechanisms.
U.S.: State Attorneys General Challenge OCC on Hiring of Climate Risk Officer
On September 29, 2022, 17 attorneys general sent a letter to the Office of the Comptroller of the Currency (the "OCC") objecting to the OCC's appointment of a Chief Climate Risk Officer and to the OCC's general focus on "climate risk" as a special category of risk for the financial system.
Dr. Yue (Nina) Chen was appointed as Chief Climate Risk Officer on September 12, 2022 (as previously reported in the Debevoise ESG Weekly Update, dated September 22, 2022). Dr. Chen oversees the OCC's Office of Climate Risk.
The attorneys general warned that they will closely monitor the Office of Climate Risk and other OCC actions, noting that "[i]f banks in our states report that federal regulators are pressuring them to cut off services to businesses based upon this administration's environmental agenda, we will investigate, litigate, and work with our Members of Congress on relevant oversight committees to ensure every regulator involved is held accountable."
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