The New York State Department of Financial Services (NYDFS) has not specified a timeline for financial institutions to implement the expectations it set in terms of management of material financial and operational risks from climate change. However, as a part of its ongoing efforts to enhance climate risk oversight, the NYDFS stated it would issue a request for information (RFI) by the end of 2024. At the time of this article’s publication, the NYDFS has not yet released the RFI.
The RFI will seek to gather insights on current industry practices and regulatory preparedness and is expected to focus on how regulated institutions are integrating climate risk into their governance, risk management, and operational frameworks. Likely areas of inquiry include:
- Board and Senior Management Oversight: How climate risks are incorporated into decision making.
- Scenario Analysis and Stress Testing: Methodologies used to assess climate-related financial impacts.
- Risk Appetite and Metrics: Climate risk thresholds and monitoring processes.
- Data and Reporting: Systems for tracking and reporting climate-related risks.
Understanding the NYDFS Guidance
The NYDFS issued a guidance document on material climate-related financial and operational risks in December 2023 for regulated banking and mortgage institutions. The document, “Guidance for New York State Regulated Banking and Mortgage Organizations Relating to Management of Material Financial and Operational Risks From Climate Change,” outlines expectations for regulated organizations to identify, assess, and manage material climate-related financial and operational risks to enhance safety, soundness, and operational resilience.
The guidance outlines a proportionate approach for regulated institutions across five key areas:
Internal Control Framework: Integrate internal control frameworks across the three lines of defense, with clear lines of authority and responsibility for monitoring adherence to policies and responsibility for monitoring adherence to policies and procedures.
Data Aggregation and Reporting: Enhance existing systems to identify, collect, and centralize data necessary to assess material climate-related financial risks. This data should support informed decision making by the board and senior management.
Corporate Governance: Establish and implement a governance with a clear and specific allocation of roles, responsibilities, and resources. These elements should be integrated within the organization’s existing structures.
Scenario Analysis: Utilize a range of climate scenarios, incorporating both quantitative and qualitative assumptions to evaluate potential impacts across different time horizons. These scenarios should consider factors such as size, complexity, business activity, and the organization’s risk profile.
Risk Management Process: Assess the impact of physical and transition risks as factors in existing risk categories. This includes identifying, measuring, monitoring, and controlling material climate-related risks through established risk management frameworks.
Preparing Responses to the NYDFS RFI
Developing a comprehensive and accurate RFI response submission is essential to show a credible commitment to integrating climate-related risks, ensuring regulatory compliance, and maintaining transparency.
Here are some anticipated questions and insights to consider when preparing responses, based on similar exercises that have taken place in other jurisdictions:
- How does your institution identify material climate-related financial risks?To respond effectively, firms should provide a clear summary of their current methods for identifying climate-related risks. This overview should include information on the frameworks and tools used, such as how cross-departmental collaboration is achieved, or how sector and location analysis or materiality mapping is undertaken. In addition, it is important to enhance the response by emphasizing governance and oversight, explaining how identified risks are incorporated into decision making and reporting processes.
- Have you developed key performance indicators (KPIs) to monitor the impacts of climate change and environmental degradation on the business model and strategy of your institution?To answer this question, institutions should describe how they selected and developed KPIs to monitor climate change and environmental degradation impacts, focusing on financial, operational, and strategic outcomes. They should describe specific metrics tied to risk exposure, climate-related opportunities, and progress toward sustainability goals. In a holistic response, firms also would outline how these KPIs are integrated into decision making, reporting frameworks, and performance evaluations.
- What opportunities has your firm identified in green finance?To create an effective response, firms should highlight any identified opportunities in investments in renewable energy, sustainable infrastructure, or green financial products, e.g., green bonds. Firms should explain how these opportunities align with overall business strategy, risk management, and sustainability goals. In addition, firms should discuss how they monitor, evaluate, and incorporate green finance into their product offerings, emphasizing long-term value creation and client engagement.
Regulated institutions should prepare to respond to the anticipated RFI. Early preparation would help ensure detailed and effective responses that align with regulatory expectations. It also would be an opportunity for firms to perform a self-assessment of their existing risk management framework and identify gaps and shortcomings they can start addressing.
Preparedness for Managing Risks – Conclusion
In creating a concise RFI response, firms should adopt a structured, transparent, and evidence-based approach that demonstrates their preparedness to manage climate risks. Taking early measures to establish clear climate risk governance, build data-driven climate risk frameworks, and enhance coordination across risk and compliance functions can help provide improved compliance readiness. Proactively addressing climate risks with transparency and collaboration not only helps with compliance but also can strengthen institutional resilience and stakeholder trust in a rapidly evolving regulatory landscape. If you have any questions or need assistance, please contact a professional at Forvis Mazars.