In January 2023, the Board of Governors of the Federal Reserve System released a report that reviews the climate action plans of global systemically important banks (“G-SIBs”) and summarizes the progress they are making toward achieving them (“Climate Action Report”).[1] As discussed below, the Climate Action Report can be an useful tool for banks that are developing sustainable financing products and climate risk management processes because it identifies key peer behaviors and widely used resources.
The Climate Action Report is a stock-taking exercise that was developed using public disclosures by the 30 G-SIBs.[2] Information sources for the disclosures include annual reports, reports made under the Task Force on Climate-Related Financial Disclosures framework, and commercial databases (e.g., Bloomberg). Federal Reserve staff categorized whether a disclosure related to sustainable finance, risk management, the G-SIB’s own activities, governance, or thought leadership and group membership.
Within each category, the Climate Action Report assesses characteristics across the portfolio of G-SIBs and the aggregate impact of G-SIB activities. For example, the Climate Action Report states that 29/30 G-SIBs measure scope 1 and 2 emissions, but only 8/30 G-SIBs measure any scope 3 emissions. It also indicates that the G-SIBs collectively have pledged $9 trillion in sustainable financing through 2030 and compares that to the $90 to $130 trillion in sustainable financing that various groups have estimated is necessary to transition to a net-zero global economy.
The Climate Action Report found that G-SIBs’ current climate-related efforts can be broadly grouped into two categories: (i) efforts towards adaptation and (ii) those towards mitigation. Adaptation efforts include governance structures established to discuss or tackle climate change issues, climate-finance thought leadership initiatives, and the development of physical and transition risk models. Mitigation efforts mainly take three forms: measuring emissions and the source of these emissions, restricting financing for certain high-emitting activities, and financing or making commitments to green investments. These efforts appear to vary widely across the G-SIB portfolio.
The Climate Action Report also identifies challenges that G-SIBs face in developing and executing climate action plans. For example, it notes that “data limitations, a lack of uniform methodology for measuring scope 3 emissions, no globally accepted definitions for high transition risk sectors, and uncertainties around evolving taxonomies for defining environmentally-sustainable economic activities hinder G-SIBs’ ability to even measure their climate-related metrics consistently.”
The Climate Action Report is a useful summary of the progress that 30 of the largest banks in the world have made toward addressing climate change. Its content may be useful in identifying predominant practices with respect to managing climate-related financial risks. It also might be used to identify some of the initiatives and information sources that G-SIBs are using to develop sustainable financing products and climate-related metrics.
However, it is important to remember that the Climate Action Report is not a regulatory reporting requirement, like the climate survey released by the Office of the Comptroller of the Currency, or a scenario analysis exercise, like the Federal Reserve’s recent initiative.[3] Accordingly, it does not impose legal requirements or supervisory expectations on financial institutions.
Nevertheless, in view of the findings above, financial institutions should consider engaging with outside counsel to help compare and contrast climate action plans, and to review policies and procedures. Outside counsel can also assist to benchmark existing and proposed plans, policies and procedures against those of peers, at the same time as checking compliance with both internal and external requirements. Firms with an international network will be best placed to compare regulatory approaches, including to taxonomies, in different jurisdictions.
[1] Federal Reserve, What are Large Global Banks Doing About Climate Change? (Jan. 2023), https://www.federalreserve.gov/econres/ifdp/what-are-large-global-banks-doing-about-climate-change.htm.
[2] See, Financial Stability Board, 2022 List of G-SIBs (Nov. 21, 2022), https://www.fsb.org/2022/11/2022-list-of-global-systemically-important-banks-g-sibs/.
[3] See our Legal Updates on these supervisory activities: https://www.mayerbrown.com/en/perspectives-events/publications/2022/01/us-occ-extends-climate-risk-survey; https://www.mayerbrown.com/en/perspectives-events/publications/2022/10/climate-scenario-analysis-exercise-announced-by-us-federal-reserve.