The Federal Reserve has recently directed the six largest banks in the United States to assess the impact of climate change on the institutions’ operations. The reports will address both the “physical risks” to people and property over a one-year horizon, including the impact on residential and commercial real estate and any mitigation provided by insurance, and the “transitions risks” of costs of transitioning to a zero-emissions economy, including the impact of such transition on corporate loans and commercial real estate over the next ten years.
By July 31, 2023, the banks will submit reports assessing the impacts of scenarios with different levels of severity affecting the Northeast, including severe hurricanes or series of hurricanes resulting in storm surge and precipitation-induced flooding, and additional physical risks for their real estate portfolios in another region of the country.
A summary of the banks’ responses should be publicly available by the end of the year, but will not include specific information or responses provided by each bank.
The exercise continues attention by the Fed to the impact of climate change on financial institutions’ risk managements, but while asking the banks to assess these impacts, Federal Reserve Chairman Powell has resisted any further regulatory actions by the Fed to mitigate climate change or the risks it poses, deferring such actions to Congress and noting that, “without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals. We are not, and will not be, a ‘climate policymaker.’”
We anticipate further attention to climate change risks in the near future by financial institutions, regulatory bodies and non-governmental entities, including development of reporting standards, and Seward & Kissel’s Real Estate Practice Group will be monitoring this situation closely.
If you have any questions, please contact Rhona Kisch (212-574-1510), Camille Paulus (212-574-1403) or Ian Silver (212-574-1209) of the Real Estate Practice Group.
If you are interested in this topic and haven’t done so already, please click below to participate in Seward & Kissel’s survey, The Impact on Real Estate from Climate Change. This short survey aims to reveal how industry participants perceive and are reacting to the impact of climate change across the commercial real estate industry, including building green energy capabilities, the SEC’s proposed disclosure requirements, and other ESG concerns.