New York Regulated Entities: Expectations for Managing Climate Risk

The New York State Department of Financial Services (NYDFS) became the first U.S. regulator to publish expectations for regulated institutions in relation to climate change risk management. The NYDFS explicitly requests that New York regulated entities begin integrating climate change risk into their governance frameworks, risk management processes and business strategies.

Background

Only recently has the spotlight been placed on climate risk, rising to a point where we hear the term mentioned in the news nearly every day. Major financial and governmental institutions around the world have already embedded climate risk into their policies and programs. Climate risk is derived from impacts related to the consequences and responses to climate change. Climate risk generally comes in two forms – physical and transition. Physical climate risk is the potential adverse impacts from climate change such as extreme weather, floods or droughts, rises in sea level or fires. Transition climate risk arises from the responses to climate change that are happening within the economy and society. The trend of enactment of climate risk policies and regulations across the globe will continue to make climate risk more prevalent.

NYDFS Expectations

In its industry letter and insurance circular letter issued in the latter half of 2020,[1] the NYDFS provided background information on climate risks and outlined expectations for New York Regulated Organizations, Non-Depositories and New York Domestic and Foreign Insurance Companies. These letters served to commence a dialogue as to how NYDFS can best support efforts to manage the financial risks from climate change. The letters noted that “financial risks from climate change are unprecedented,” and that it is critical to “prudently manage physical and transition risks from climate change.”

The NYDFS expectations include the following activities which would be tailored depending on the type of institution, however, we proffer that these are good practices to be employed by all:

DESIGNATE MEMBERS

Designate a board member, a committee of the board (or an equivalent function), as well as a senior management function, to be responsible for the organization’s assessment and management of the financial risks related to climate change

EVALUATE IMPACT OF CLIMATE CHANGE

Conduct an enterprise-wide risk assessment to evaluate climate change and its impacts on risk factors, such as credit risk, market risk, liquidity risk, operational risk, reputational risk and strategy risk

DEVELOP APPROACH

Develop an approach to climate-related financial risk disclosures and consider engaging with the Task Force for Climate-Related Financial Disclosures framework and other established initiatives when doing so

CONDUCT A RISK ASSESSMENT

Conduct a risk assessment of the physical and transition risks of climate change, whether directly impacting them, or indirectly due to the disruptive consequences of climate change in the communities they serve and for their customers, such as business disruptions, out-migrations, loss of income and higher default rates, supply chain disruptions and changes in investor and consumer sentiments

DEVELOP STRATEGIC PLANS

Develop strategic plans, including an outline of such risks, the impact on their balance sheets and steps to be taken to mitigate such risks

The NYDFS is coordinating with U.S. and international counterparts to develop effective supervisory practices, as well as guidance and best practices to mitigate the financial risks from climate change. In 2019, the NYDFS became the first U.S. regulator to join the climate change coalition, Network for Greening the Financial System (NGFS).[2]

The NYDFS recognizes that climate change can affect organizations in different ways, therefore recommending that each organization take an approach that reflects its exposure to the financial risks from climate change and the nature, scale and complexity of its business. The NYDFS is developing a strategy for integrating climate-related risks into its supervisory mandate and will begin engaging with NYDFS Regulated organizations.

How DHG Can help

DHG Advisory provides services to clients for all aspects of climate risk including embedding into existing risk frameworks, scenario modeling, data sourcing, climate-related disclosures, reporting and overall implementation planning. Our team of dedicated domain professionals are prepared to advise on the complexities of climate risk to help manage your organization’s contribution to the global imperative of sustainability.  For more information, please contact us at dhgadvisory@dhg.com.

References:

[1] https://www.dfs.ny.gov/industry_guidance/industry_letters/il20201029_climate_change_financial_risks for financial institutions and https://www.dfs.ny.gov/industry_guidance/circular_letters/cl2020_15 for the insurance industry.

[2]  https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1909242

ABOUT THE AUTHORS

Michael Rosen
Manager, DHG Advisory | Enterprise Risk & Quantitative Advisory

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