US Federal Reserve Blocks Plans to Subject US Banks to Tough ESG Rules

According to Bloomberg, the US Federal Reserve is thwarting the European Central Bank's (ECB) plan to require banks to focus on addressing climate risks.

The ECB proposals seek to make climate risks a pillar of the global rules governing the banking industry. The rules also mandate that banks report the strategies they are using to meet climate commitments.

US regulators, led by the Federal Reserve, have thwarted a push to make climate risk a focus of global financial rules, sources say https://t.co/kfeVMJkyCR

- Bloomberg Economics (@economics) April 3, 2024

The Bloomberg report said the US Federal Reserve has rejected these rules. In closed-door meeting discussions, Fed policymakers have expressed their concerns over these rules adding that the Basel Committee on Banking Supervision (BCBS) might be overreaching with the type of supervision it wanted.

Push for Banks to Comply with Climate Change Rules

The BCBS includes bank supervisory authorities and central banks around the world. The committee has been advocating for banks to make ESG commitments and prioritize addressing climate rules.

However, the Federal Reserve believes the committee is overreaching with this requirement. Federal Reserve officials said they have a slim mandate in this sector to oversee the climate risk disclosures from Wall Street banks.

The Basel Committee's authority is limited to making proposals and recommendations. This committee cannot enforce its banking system standards on individual countries. However, it could create a global baseline that individual countries can use to develop their own rules and guidelines.

The resistance of the Federal Reserve to implement the climate change guidelines demonstrates the rift between the countries that make up the committee and individual central banks.

While Europe has shown increased commitment to implementing tough rules on climate change, the US has remained adamant, and it is less willing to change the banking structure to implement these guidelines.

US Banks Threaten to Abandon Climate Alliance

According to a report by the Financial Times, in 2022, some of the largest banks on Wall Street threatened to abandon the UN climate envoy known as the Mark Carney financial alliance over legal risks.

Bank of America, JPMorgan, and Morgan Stanley are the major US banks that have abandoned these climate plans. At the time, the institutions said they were exploring a lawsuit amid fears of a lawsuit because of the strict decarbonization commitments implemented by the alliance.

Some members of the Glasgow Financial Alliance for Net Zero have also previously complained of being blindsided by the strict UN climate criteria. The alliance said there were concerns about the legal risks associated with their participation.

Tough ESG Rules for Banks in Europe

European banks are required to integrate their environmental, social, and governance risks in managing risks. The European Banking Authority (EBA) published draft guidelines in January calling for the management of ESG risks.

The European Banking Authority also released a consultation paper on draft proposals for banking institutions after releasing a public consultation phase that will run until April 18, 2024.

The EBA has said that climate change, environmental degradation, social matters, and other ESG factors pose a major challenge to the economy and can have a notable effect on the financial industry.

The banking authority has also said that ESG risks can affect institutions' climate risk profiles and business models. Moreover, risks facing the environment driven by transition and physical factors could also pose a major concern.

Institutions, based on regular and comprehensive materiality assessments of ESG risks, should ensure that they are able to properly identify and measure ESG risks through sound data processes and a combination of methodologies, including exposure-based, portfolio-based and scenario-based methodologies," the EBA said.

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