Six major American financial institutions struggled to accurately assess the extent of their exposure to climate change and related risks, according to the Federal Reserve.
The Fed ran a pilot program for six leading American banks to assess how ready they are to keep track of the risks that climate change poses to their businesses, a practice that the Securities and Exchange Commission (SEC) is attempting to mandate for large corporations across the country. The banks — JP Morgan, Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley and Citigroup — generally struggled to assess their exposure to climate change because they lacked key data and because climate risk modeling is so new that even the country’s biggest banks could not identify reliable techniques, according to the Fed’s May report on the pilot program.
“Participants reported significant data and modeling challenges in estimating climate-related financial risks,” the report states. “For example, participants noted a lack of comprehensive and consistent data related to building characteristics, insurance coverage, and counterparties’ plans to manage climate-related risks. In many cases, participants relied on external vendors to fill data and modeling gaps.” (RELATED: Dems, Media Push New Study Linking Climate Change To Inflation, But Economists Aren’t Buying It)
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All of the banks that participated in the exercise said that some key details of insurance markets also posed problems for their efforts to determine their exposure to climate change-related risks, according to the Fed’s report. The banks’ uncertainty on insurance deductibles and the costs of replacing destroyed property forced them to lean on assumptions about how much of the costs would fall on insurers and how much would be the burden of the banks.
Additionally, the report states that the banks outsourced certain aspects of their climate risk modeling to third party organizations because the banks do not have the right personnel or systems of their own to build their own models.
“In the end you’re not sure what the reliability of that estimate really is,” Clifford Rossi, formerly a risk officer for Citigroup’s consumer lending business and now a professor at the University of Maryland’s business school, told E&E News. “The models are nowhere near ready for prime time in making hard money decisions.”
The difficulties that America’s largest banks encountered when trying to assess their own exposure to climate change could be a troubling development in light of the SEC’s major climate risk disclosure mandate, which the agency finalized in March before pausing the regulation in April as legal challenges go through the courts.
The SEC’s rule will require certain medium-sized and large corporations to disclose material climate risks and climate-related goals and targets, as well as some types of direct and indirect greenhouse gas emissions, in their official filings, according to White and Case, a global law firm. While the rule’s proponents have hailed it as a major step toward providing investors and markets with much-needed data about climate change’s possible impacts on markets, critics have charged the SEC with overstepping its mandate and saddling companies with onerous new reporting requirements that are difficult to calculate.
Additionally, California has a corporate climate disclosure mandate for companies doing business in the state, which Democratic California Gov. Gavin Newsom signed into law in October 2023. California’s rules are more aggressive than the federal mandate, as they will require corporations with annual revenues in excess of $1 billion to report emissions, climate-related risks to their businesses and their progress on climate goals, among other things, according to the law firm McDermott Will and Emery.
The SEC did not respond immediately to a request for comment. JP Morgan declined to comment, while the other five banks did not respond immediately to requests for comment.
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