Bank regulators repeal intrusive ESG guidance

The Federal Deposit Insurance Corporation (FDIC) and Federal Reserve Board of Governors (Fed Board) withdrew their controversial interagency guidance on climate financial risks on October 16. This follows the Office of the Comptroller of the Currency (OCC) rescinding its portion of the guidance last March. The move represents a notable rebuke to climate-finance policy, as Trump administration officials continue to repeal and reform environmental, social, and governance (ESG) mandates. This decision is welcome, as it prevents repressive climate change risk standards from interfering with the private risk management processes at large banks.

This interagency guidance, known as “Principles for Climate-Related Financial Risk Management for Large Financial Institutions,” represented a three-way pact among the FDIC, Fed Board, and the OCC. The guidance imposed burdensome climate-related financial risk principles that bank managers were expected to implement. Specifically, it required large financial institutions – namely banks and asset managers – with more than $100 billion in assets to adopt a set of government-prescribed climate risk management principles.

These principles establish how bank leaders should manage risks associated with climate change threats. They include protocols for securing financial assets against physical risks from severe weather events such as hurricanes, tornadoes, and floods. Large institutions were also expected to establish standards for mitigating risks tied to organizational transitions from climate change, such as shifting from fossil fuel reliance to renewable energy via wind and solar power.

These guidance principles generated fierce pushback from Republicans in Congress. In April 2024, House Republicans advanced a Congressional Review Act (CRA) resolution of disapproval against each regulator’s principles. Members of the House Financial Services Committee successfully adopted the resolutions to nullify the Fed Board’s, FDIC’s, and OCC’s principles.

Unfortunately, the CRAs only advanced out of committee and were never voted on by the full House. They were very unlikely to be signed into law by President Joe Biden at the time. With Trump back in office, this new change in executive branch policy represents a major turn away from the previous ESG-aligned regulatory regime.

For context, administrative guidance is not the same as actual rules and regulations. The Administrative Procedure Act, § 553 sec (A), enables guidance manuals such as these principles to bypass the notice-and-comment process. Guidance represents sub-regulatory content that allows regulators to issue interpretations of their policy positions and signal what they expect from regulated parties.

Agency guidance, including the above principles, is not legally binding. The trio of agencies claimed that they adopted the guidance within the boundaries of their enabling statues. To this end, “the agencies did not incorporate suggestions for changes to the draft principles that extend beyond the agencies’ statutory mandates relating to safety and soundness,” according to the principles.

The principles are non-legislative rules meant to encourage large financial institutions to adopt risk-adjusted protocols. They effectively projected the Biden administration’s environmental policy position on the perceived threats of climate change.

However, earlier this year, I made the case that the three agencies exceeded their statutory missions by imposing these principles. In my public policy memo for State Policy Network (SPN), I explain how the interagency guidance intrudes on large financial institutions’ internal risk management protocols.

Though nominally voluntary, this guidance was crafted to shift the behavior of the largest financial institutions toward treating climate change as a serious systemic threat to their financial interests. The guidance directs the boards of large banks to “allocate appropriate resources to support climate-related financial risk management.” Such behavior would trigger a domino effect, prompting smaller and mid-sized institutions to mimic the big banks under these principles.

Contrary to the agencies’ claims, these principles exceed their statutory authority to ensure safety and soundness. As I explain in my SPN memo, it’s not the role of financial regulators to equate external climate change risks with traditional risks facing financial deposits.

In fact, these regulatory bodies oversee how banks manage internal financial risks facing depositors. Such risks are concrete, grounded in detectable issues that customers may encounter when preserving their savings and assets.

For example, the FDIC’s risk management manual only addresses the threat of real environmental risks, rather than hypothetical climate threats. It suggests banks should consider these instructions to avoid noncompliance under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980.

Similarly, the OCC’s supervisory authority for banks begins and ends with mitigating risks to consumer interests and access to reputable services. Hypothetical climate change risks fall well outside the agency’s mandate. And the Fed Board requires bank holding companies to maintain a risk management framework. It does not adopt its own set of risk management principles to combat climate change or anything else.

We should encourage more deregulatory efforts across the federal government to eliminate mandatory ESG policies. While such rules and regulations are a primary focus of regulatory reformers in the current administration, many low-profile guidance documents flying under the radar require attention. If not for the congressional uproar against these climate risk principles, the current leadership at the FDIC, OCC, and Fed Board may have still been enforcing this problematic guidance. Bank regulators must focus only on concrete, demonstrable financial risks and allow banks to manage those risks as they deem fit.