Thursday, November 5, 2020

Climate Change: Business Continuity Challenges

We have been using your Disaster Recovery and Business Continuity Plan. It covers everything we need. Recently, our meetings have been focused on climate change and its effects on our company. Being in California, most of us in our company have come to realize that climate change is causing business interruptions for us.

I head up our compliance team, and we use your Business Continuity Checklist in connection with the Disaster Recovery and Business Continuity Plan in developing our infrastructure strategies. This is definitely the best checklist we have found to work with.

Although the Plan covers the various ways to protect our company in the case of a disaster or business disruption, we were wondering, would you provide a new section in the Checklist that is devoted to climate change?

What a great question! The Business Continuity Plan Checklist & Workbook (Includes COVID-19 Pandemic Response) was first published on March 16, 2020, and Update # 7 was published on May 26, 2020, consisting of 208 pages. The Checklist is complimentary, principally because I felt that it is obscene to charge people for it in the middle of a pandemic. Our company does not put profit over people. 

It is a good idea to combine the use of the Checklist with our Disaster Recovery and Business Continuity Plan, Includes Pandemic Response. By doing so, you are strengthening your due diligence review, ensuring that the Plan reflects your business model and compliance needs, and establishing an internal self-assessment process. All good!

Since May, we have been waiting for a stimulus bill to pass, and that is why the Checklist has not been updated. There have been developments other than the stimulus bill, of course, but that bill is important to keeping employees financially able to survive and companies economically capable of survival. Unfortunately, the House sent the bill to the Senate where it found a reluctant response and tedious negotiations. Indeed, even in the midst of a pandemic and extreme hardships, the Senate put off working on the bill.

Given your request, we are publishing today Update # 8 of the Checklist, providing a new section on climate change. In the future, I may update it again for other developments since May as well as any dispositive results regarding the stimulus bill. So, I suggest you download now the free Update # 8 version of the Checklist, which contains the new climate change section. 

To get the free Checklist, click here.

To order the Plan, click here.

Banking departments have taken it upon themselves to consider the risks of climate change with respect to events that could cause severe interruption of financial activities. I have no doubt that these actions will eventually be extrapolated into examination and enforcement.

A very good model has recently been provided by the NYS Department of Financial Services. On October 29, the NYSDFS issued a letter to state-regulated financial institutions, which provides background information for, and outlines the NYSDFS’s expectations, regarding climate change risk.[i] The department outlines the various physical and transition risks that are brought about by climate change. According to the letter, the types of assets that can be at risk due to weather events are mortgage loans, commercial real estate loans, agricultural loans, and derivatives portfolios.

In addition, the letter highlights that climate change could “negatively impact the balance sheets of regulated non-depositories through adverse impact on the businesses of their customers, including their loss of income, as well as any devalued investments due to physical or transition risks.”

It is important to note that the letter outlines the NYSDFS’s “expectation(s)” with respect to regulated organizations and regulated non-depositories, including incorporating financial risk from climate change into governance frameworks and risk management processes, and suggests that non-depositories develop strategic plans for the effects of climate change.

In banking department parlance, the word “expectation” does not mean assumes, forecasts, intends, predicts, promises, views, supposes, or hopes – it means one thing and one thing only: obligation

Do not wait for an examination to punch holes in your risk prevention efforts with respect to climate change!

So, let me set forth the essential features of the NYSDFS’s guidelines. If you are one of the 1,500 banking and financial institutions regulated by the NYSDFS, take heed. And if you are not regulated by the NYSDFS, also take heed, because it is very likely your state’s banking department will follow a similar course.

The department includes the expectations for all regulated organizations as well as the expectations for regulated non-depositories.

Expectations: All Regulated Organizations

1. Integrate the financial risks from climate change into the governance frameworks, risk management processes, and business strategies.

a. For example, regulated organizations should designate a board member, a committee of the board (or an equivalent function), as well as a senior management function, as accountable for the organization’s assessment and management of the financial risks from climate change.

b. This should include 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; and

2. Develop the approach to climate-related financial risk disclosure and consider engaging with the Task Force for Climate-related Financial Disclosures[ii] framework and other established initiatives when doing so.

If you are not familiar with the Task Force, referred to by its acronym TCFD, it is an important initiative of the Financial Stability Board. The TCFD has developed a framework to help public companies and other organizations more effectively disclose climate-related risks and opportunities through their existing reporting processes. To do so, it provides guidance with respect to governance, strategy, risk management, and metrics and targets.

Expectations: All Regulated Non-Depositories

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

The NYSDFS letter ends with these words from Linda Lacewell, Superintendent:

"The challenge ahead is great, but we know from experience that together we can meet it. Mitigating the financial risks from climate change is a critical component of creating a stronger industry and a healthier and safer world for ourselves, our families, and future generations. There is no more time to wait. Let’s get to work."

I wholeheartedly agree! Let’s get started. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

[i] Climate Change and Financial Risks, Letter, New York State Department of Financial Services, 10.29.20
[ii] Task Force for Climate-related Financial Disclosures