Corporate Counsel Daily, New York State unveils guidance to banks on climate risk, (Jan 3, 2024)

By Steven Melendez

Gov. Kathy Hochul announced the state Department of Financial Services' new guidance document for banks on managing climate change risks.

The New York State Department of Financial Services (DFS) released a guidance document for state-regulated banking and mortgage institutions on managing risks connected to climate change. “Climate change is impacting every sector of New York's economy, including financial services,” Gov. Kathy Hochul said in a statement. “As the financial capital of the world, I'm proud that we are proactively addressing climate-related financial risks so that New Yorkers can continue to have access to affordable financial services.”

The new guidance document covers issues related to risk management, corporate governance, internal controls, data collection and analysis, and fair lending obligations, discussing both risks from climate change itself—like weather disasters and rising sea levels—and related economic and social transitions. The guidance applies to state-regulated banking institutions, state-licensed branches of foreign banking organizations, and state-regulated mortgage bankers and servicers. The DFS had sought feedback on proposed guidance early last year (see Banking and Finance Law Daily, Jan. 6, 2023).

"Indirect consequences of transition risks may arise, if, for example, a company with significant operations in a discrete geographic area faces declining revenue prospects associated with its exposure to climate-related financial risk," according to the guidance. "The ramifications of this financial impact may include loss of household income, population outflows, and attendant declines in property values, which could affect an organization’s customer base and mortgage portfolio."

"To protect New Yorkers from financial harm, regulated institutions must anticipate and respond to new and emerging risks," said DFS Superintendent Adrienne A. Harris. "Today’s guidance provides these institutions with a balanced, data-driven approach to preserve safety and soundness and operational resiliency by addressing the risks posed by climate change."

Regulated institutions should set up "sound practices" for assessing climate-related "financial and operational risk exposure" as part of their risk management strategies, and boards should consider these risks when evaluating overall strategy and "risk appetite," according to the document. Boards should ensure that they and top managers are educated on climate risk, establish necessary corporate structures for analyzing and managing it, and make sure bank staff are prepared to do so as needed," according to the DFS.

"For example, the board should ensure that credit management, especially the loan committee or equivalent body responsible for overseeing and managing credit risk, is fully capable of and will be held accountable for implementing the organization’s business strategies and adhering to the risk management framework that integrates climate-related financial risks," according to the document.

Institutions should assess climate risk during client onboarding and credit application review, through risk management processes, and through internal audit processes, according to the guidance. Risks to be considered include credit risk, liquidity risk, market risk, legal and compliance risks from a shifting legal landscape, operational risk from "extreme weather events or changing chronic conditions," and "strategic risk" as changing conditions affect "feasibility of goals and requirements for their implementation."

DFS emphasizes that financial institutions should address climate risk in a way that complies with fair lending rules. Low-and-moderate-income communities and communities of color are disproportionately impacted by climate change, according to the guidance, and "the Department expects Regulated Organizations to minimize and affirmatively mitigate disproportionate impacts that may violate fair lending laws and other applicable consumer-protection laws, regulations, and guidance."

The document doesn't come with a firm implementation date. DFS is slated to solicit more information from regulated institutions through a request for information this year before setting a timeline.

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