US Fed Resists ECB-Led Push for Climate Risk Reporting Rules

Efforts led by the European Central Bank (ECB) to establish climate risks as a fundamental aspect of global banking regulations have faced a setback, as the US Federal Reserve has reportedly blocked attempts to mandate banks to disclose their strategies for meeting climate commitments. Sources familiar with the matter revealed to Bloomberg that the US Federal Reserve’s resistance reflects concerns regarding the jurisdictional scope and regulatory mandate of such rules.

The Basel Committee on Banking Supervision (BCBS), comprising central banks and bank supervisors worldwide, has witnessed divisions among its members regarding the integration of climate risks and Environmental, Social, and Governance (ESG) commitments into banking regulations. While some members advocate for embedding climate risks at the core of new banking standards globally, the US Federal Reserve has raised objections in closed-door meetings, expressing reservations about potential overreach by the committee in this area.

According to some sources, Federal Reserve officials believe that the committee’s focus on climate risk supervision exceeds their mandate, particularly in light of their regulatory role in overseeing climate risk disclosures from Wall Street banks. This dissent underscores the divergence in regulatory approaches between the US and Europe, where the latter is committed to enforcing more stringent ESG regulations.

The Basel Committee’s inability to enforce uniform banking standards across jurisdictions underscores the potential for setting a global baseline that individual countries can adapt to their specific regulatory frameworks. However, the resistance from the US Federal Reserve underscores the challenges in achieving consensus on climate risk reporting standards at an international level.

In contrast, the European Banking Authority (EBA) has taken proactive steps to address ESG risks in the banking sector. In January, the EBA released draft guidelines requiring European banks to integrate environmental, social, and governance risks into their risk management frameworks. The consultation paper on these proposals, open until April 18, 2024, emphasizes the significant economic challenges posed by climate change and other ESG factors, urging banks to consider these risks in their business models and operations.

The EBA’s stance reflects a broader commitment within Europe to enhance regulatory oversight and accountability in addressing climate and sustainability challenges. As global financial institutions navigate the evolving landscape of ESG regulation, the tension between differing regulatory approaches underscores the complexity of achieving international consensus on climate risk reporting standards.