The FSOC weighs in on climate risk

The Financial Stability Oversight Council (FSOC) was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act as a result of the 2007-2008 US financial crisis. A first of its kind, the 15-member council is tasked primarily with identifying growing systemic risks to US financial stability and proposing coordinated regulatory responses to both preempt emerging threats and mitigate opportunistic moral hazard on behalf of market participants. The FSOC’s 2020 Annual Report focused largely on responding to the COVID-19 pandemic and addressing related systemic risks. What was confoundingly absent from the 2020 report, though, was any reference to climate risk.

However, the FSOC’s focus has changed in 2021. In response to a shifting global regulatory agenda and the new administration’s demand for an all-hands-on-deck approach to what it perceives as the next great threat to our financial system, the FSOC is setting its sights on its next target: climate risk.

On October 21, 2021, the FSOC – pursuant to President Biden’s Executive Order issued earlier this year – released a comprehensive Report on Climate-Related Financial Risk, which included, among other things, a number of targeted recommendations for US regulators. These recommendations are classified into four critical areas of priority:

• Building capacity and expanding efforts to address climate-related financial risks;
• Filling climate-related data and methodological gaps;
• Enhancing public climate-related disclosures; and
• Assessing and mitigating climate-related risks that could threaten the stability of the financial system.

In public remarks, Treasury Secretary Janet Yellen said that the recommendations within the report will support the Biden Administration’s “urgent, whole-of-government effort on climate change,”1 while acknowledging that this was only a “first step towards making our financial system more resilient.”

But make no mistake about it, while the FSOC can provide much-needed direction and forethought, each regulator and market participant has its own critical role to play in tackling this rapidly emerging and strategic risk.

Real or perceived, the numbers speak for themselves. According to data gathered by climate.gov, in 2020, “there were 22 separate billion-dollar weather and climate disasters across the United States, shattering the previous annual record…[and] cost[ing] the nation a combined $95 billion in damages.”2 And rolling estimates for 2021 and beyond are not encouraging.

There is an acceleration of climate-related regulations which will only continue and require more focus from organizations in their risk mitigation efforts.

Organizations must be prepared to respond to incoming regulations and to embed appropriate monitoring and surveillance processes to support their regulatory obligations. Among other items, there should be a consideration to the following:

• Perform a robust enterprise-wide risk assessment (operational and financial);
• Improve risk-based decision making based on data that supports reducing risk exposure;
• Implement an operating model with governance and oversight at its core;
• Ensure disclosures for internal and external stakeholders clearly articulate business risk exposures and risk appetite;
• Illustrate tangible organizational improvement activities, defining the net-zero strategy; and
• Have the necessary resources to anticipate and react to changing social, governmental, legal, regulatory and tax requirements for countries they operate in.

Mazars is here to help the various constituents across the financial services industry achieve their tactical and strategic objectives; in response to a whole-of-government effort, we at Mazars are similarly taking an integrated approach.

Combining our extensive knowledge of climate-related regulations with our expertise in the financial services market, we offer a suite of solutions that support our clients in addressing forthcoming regulations and will help to facilitate and de-risk your transition.

We have listened to what is important to our clients and key stakeholders, and we have tailored our offerings into four focus areas:

1. Strategy
2. Risk management
3. Reporting & assurance
4. Implementation & transformation

With complimentary offerings that can provide anything from bespoke services to nearly turn-key solutions, we have assembled teams of experts to address your needs and help your business remain resilient.

_{[1] https://home.treasury.gov/news/press-releases/jy0426
[2] https://www.climate.gov/news-features/blogs/beyond-data/2020-us-billion-dollar-weather-and-climate-disasters-historical}