New York State tells banks to look out for climate risks

On the second day of Christmas, DFS gave to me: Climate finance guidance

New York State tells banks to look out for climate risks
A butter Christmas ornament my ex-wife gave me this year. I love it a lot.

Welcome to the ongoing Twelve Days of New York Climate Nerd Christmas! It’s Day Two. I hope you’ve all had as many little festive snacky foods as I have today.

On December 21, the New York State Department of Financial Services adopted new guidance for banks and mortgage lenders on managing risks related to climate change.

Some of the risks climate change poses to banks are direct and physical. Climate change accelerates the pace and intensity of natural disasters, and disasters cause financial mayhem. A bad flood or a wildfire in a residential neighborhood can damage a lot of mortgages at once for a lender.

Other banking risks are less obvious. In addition to the physical damage caused by climate change, there are also “transition risks” posed by shifts in behavior that happen on a large enough scale to tip the balance on investments. Transition risks can make whole industries suddenly more risky to invest in, in ways that are hard to foresee.

What makes both kinds of climate risk especially difficult, for banks and other finance-industry institutions, is that they are loaded with uncertainty. They can also interact with each other in unpredictable ways — as policy analyst Yevgeny Shrago told me back in 2021, when New York’s DFS released climate risk guidelines for the insurance industry.

“Climate risk and climate-related risk is not business-as-usual risk,” Shrago told me. “Climate risk is highly complex, correlated, and non-linear.”

The complexity and unpredictability of climate risk makes it hard to for financial institutions to manage. One of the ways state and national governments can make climate risks a little more predictable is to make climate policy that lays out plans for how the transition to clean energy will go, and boost the physical resilience of communities.

“Disorderly climate-driven economic transition increases risk to financial stability,” reads a line from New York’s latest climate guidance for banks.

The world of climate risk management for the financial industry is a fast-evolving frontier. Since it’s a key state for financial institutions to operate in, New York’s evolving climate guidance might end up having outsized importance compared to rules from other states. The federal government is also wading into these waters: In October, the Federal Reserve finalized climate guidance for large banks, a move that was fiercely opposed by Republicans in Congress.

Climate risk in banking is a deep topic, and an evolving one. If you’re interested in getting into the weeds: New York’s DFS will host a webinar on Thursday, January 11, 2024 about the new guidance.

As someone who’s spent a lot more time in the realms of science and policy than finance, I hope to learn more about this issue myself — and if any finance-minded Empire of Dirt readers want to sound off on it, please feel free to get in touch.

On the first day of Christmas, NYSERDA gave to me: A cap-and-invest study