US’s OCC commits to tackle climate change risk

The US’s Office of the Comptroller of the Currency (OCC) has become the latest financial regulator to demonstrate a shifting attitude towards climate risk, with the appointment of Darrin Benhart as Climate Change Risk Officer. The role is the first of its kind within the agency, which acts as the primary prudential regulator for around 70% of assets within the US commercial banking system.

As well as Benhart’s appointment, the OCC has also announced that it has joined global banks and regulators in becoming a member of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).

A two-pronged approach to climate risk

Earlier in the year, the OCC said that it would take a “two-pronged approach” to climate change risk, insofar as it would:

• Engage and learn from others; and
• Support the development and adoption of effective climate risk management practices at banks.

The regulator’s latest announcements are the first steps towards proving that it does intend to shift it’s focus and battling the emerging iceberg of climate change and ESG measures within financial services.

The changes announced today will enable the agency to be more proactive in accelerating the development and adoption of robust climate change risk management practices, especially at the larger banks.

Acting Comptroller of the Currency, Michael Hsu

CUBE comment

In April this year, the UK’s FCA appointed Sacha Sadan as its first ever Director of Environment Social and Governance. In the past few months we’ve seen financial regulators from across the globe, including the Securities and Exchange Commission (SEC) make clear, concrete commitments to tackling all three pillars of ESG. The OCC’s appointment shows this prudential regulator to be changing tack and following in the footsteps of its peers.

As we’ve seen in recent weeks – from flash floods to large, all-consuming fires – climate change issues are both real and increasing. Of course, these events have the potential to devastate lives and communities, but they will also pose financial and economic risks, including the devaluation of assets and an influx of insurance-related issues, from tourism to property.

Financial institutions are increasingly grappling with these risks across the breadth of their business, from the way they are built into internal policies and controls, to the way they manage climate-related incidents and mitigate risk. This is no mean feat; following a year dogged by increased risk owing to covid-19, firms’ resources will undoubtedly be stretched to manage the wave of emerging regulation and expectation that will unfold.

Action such as that announced by the OCC shows that regulators are working to cement a regulatory framework that supports such institutions and the customers they serve. As with similar regulatory moves, however, it is likely that we will see increased regulatory scrutiny around climate-change measures from the OCC in coming months. As Acting Comptroller Hsu commented, the new role will “significantly expand the agency’s capacity to collaborate with stakeholders and to promote improvements in climate change risk management at banks.”

How to manage emerging regulatory focus for climate risk

The OCC’s commitment to tackling climate change is commendable, as its desire to collaborate with stakeholders to meet such a goal. There is no doubt in my mind though that these positive steps will require the need for increased resources in the compliance team or, better than that, a change in approach for the way that such teams manage compliance. By doing away with manual regulatory change and horizon scanning processes, stretched – but highly talented – compliance and legal teams will be freed up from mundane tasks and better equipped to navigate and successfully comply with the shifting regulatory landscape.

The future? A compliance team equipped with technology, that is ready to quickly adapt to the challenges of modern-day regulatory change.