The institutions involved in the program were JP Morgan, Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup.
The Federal Reserve's initiative was designed to evaluate the preparedness of these banks in tracking the risks that climate change presents to their operations. This is a practice that the Securities and Exchange Commission (SEC) is seeking to make mandatory for large corporations nationwide. However, the banks generally struggled to gauge their exposure to climate change due to a lack of crucial data and the novelty of climate risk modeling.
The Federal Reserve's report on the pilot program, published in May, stated, “Participants reported significant data and modeling challenges in estimating climate-related financial risks.” The report further elaborated that the banks noted a dearth of comprehensive and consistent data related to building characteristics, insurance coverage, and counterparties' plans to manage climate-related risks.
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The banks also highlighted that certain key aspects of insurance markets posed challenges for their efforts to determine their exposure to climate change-related risks. Uncertainty surrounding insurance deductibles and the costs of replacing destroyed property compelled the banks to make assumptions about the proportion of costs that would be borne by insurers and the banks themselves.
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The report also revealed that the banks had to outsource certain elements of their climate risk modeling to third-party organizations due to a lack of appropriate personnel or systems to develop their own models. Clifford Rossi, a former risk officer for Citigroup’s consumer lending business and current professor at the University of Maryland’s business school, expressed skepticism about the reliability of these estimates. He told E&E News, “The models are nowhere near ready for prime time in making hard money decisions.”
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The struggles faced by these major banks in assessing their exposure to climate change could be a cause for concern, particularly in light of the SEC’s climate risk disclosure mandate. The SEC finalized this rule in March, only to pause its implementation in April due to ongoing legal challenges.
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The rule will require certain medium-sized and large corporations to disclose material climate risks, climate-related goals and targets, and some types of direct and indirect greenhouse gas emissions in their official filings. While proponents of the rule view it as a significant step towards providing investors and markets with crucial data on the potential impacts of climate change, critics argue that the SEC is overstepping its mandate and burdening companies with difficult-to-calculate reporting requirements.
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In addition to the federal mandate, California has its own corporate climate disclosure mandate for companies operating within the state. Signed into law by Democratic California Gov. Gavin Newsom in October 2023, California’s rules are more stringent than the federal mandate. They require corporations with annual revenues exceeding $1 billion to report emissions, climate-related risks to their businesses, and their progress on climate goals, among other things.
