The New York Department of Financial Services (NYDFS) has just released guidance to support efforts by regulated institutions in assessing and managing their material climate-related financial and operational risks.

The guidance clarifies the agency’s expectation that regulated institutions start integrating both financial and operational risks from climate change into their governance frameworks, risk management processes, and business strategies, and start developing their approach to climate-related financial risk disclosure.

The guidance stresses that businesses may incorporate these novel and evolving risks into their existing risk management frameworks in a manner that is consistent with the nature, scale and complexity of their businesses, plus their established risk appetites and business strategies.

The guidance applies to New York-regulated banking organizations, New York-licensed branches and agencies of foreign banking organizations, and New York-regulated mortgage bankers and mortgage servicers.

Prior to the issuance of the new guidance, NYDFS said it carefully considered the feedback received on its December 2022 proposed guidance from regulated entities and other key stakeholders. 

NYDFS will host a webinar on January 11 to provide an overview of these documents and the key themes from the public feedback.

Climate-related financial risks

The guidance makes a few interesting points:

• NYDFS says that “for the avoidance of doubt, this guidance neither prohibits nor establishes limits for providing loans or other banking or mortgage-related services to customers of any specific class or type, as permitted by law or regulation.”
• It counsels regulated entities to be mindful that changes to their risk management frameworks to account for climate-related financial and operational risks must not unduly harm or disadvantage at-risk communities.
• Foreign banking organizations may take into account their home-country regulators’ requirements, as appropriate, the agency says.
• In answer to an FAQ, NYDFS said it does not currently plan to issue actual regulations pertaining to its climate-related supervisory activities, “with the exception of Insurance Regulation 203, which we are proposing to amend to include climate change as one of the reasonably foreseeable and relevant material risks to be addressed by insurers’ enterprise risk management function.”

And just to remind everyone why climate-related risks are potentially material, and those that are should be addressed and disclosed, NYDFS says climate-related natural disasters can wreak havoc on financial markets in a number ways.

They can lead to business disruption, destruction of capital, increased costs to recover from disasters, stress on infrastructure, reduced revenue, and human migration, each of which may significantly affect a regulated organization’s clients or even the institution itself.

And although insurance is an important mitigating factor in relation to climate-related financial risks, continued availability of the same level or type of coverage is certainly not assured.

Related guidance documents

On October 29, 2020, NYDFS issued an industry letter outlining its expectations related to addressing the financial risks from climate change to all New York-regulated businesses, including those institutions mentioned above with its latest guidance, plus money transmitters, licensed lenders, sales finance companies, premium finance agencies, and virtual currency companies.

In February 2021, NYDFS issued an industry letter alerting banking institutions subject to the New York Community Reinvestment Act that they may receive credit for financing activities that support the climate resiliency of low- and moderate-income, and underserved communities.

In November 2021, NYDFS issued final guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change, detailing its expectations related to insurers’ management of the financial risks from climate change.