New York regulator set to incorporate climate change into supervision

The New York State Department of Financial Services has formed a new division to handle climate risk, establishing the agency’s leading role among state banking regulators in addressing the threats posed by a warming planet.

The new unit will incorporate climate risk into the supervision of banks and insurers, collaborate with peer regulators and coordinate with other national, international and state agencies, the department said Wednesday. It will be led by Yue (Nina) Chen, expanding on her previous role as the agency’s director of sustainability and climate initiatives.

New York is thought to be the first state whose financial regulator has established a designated team focused on climate risk.

“When you see New York and California move on something, you generally see pressure building within other states to also take action,” said Lauren Compere, managing director at Boston Common Asset Management, an environmentally conscious investment firm. “I think this is a dream come true for a lot of climate finance experts who have really been looking at systemic financial interventions in the U.S.”

Climate change has gotten much more attention from federal financial regulators since President Biden took office in January, though Republicans have criticized the new focus on climate risk as politicizing the banking system.

Last month, the Financial Stability Oversight Council issued a report that detailed the potential risks of climate change to the financial system, stressing the need for markets and regulators to have better data and enhanced disclosures.

And on Wednesday, the Network for Greening the Financial System, a global coalition of bank supervisors working on climate risk, committed to deepening, expanding and strengthening their collective efforts. The Federal Reserve and the Office of the Comptroller of the Currency, both of which are members of the international group, issued statements in support of that commitment.

Over the last two years, the New York financial services regulator has made numerous climate-related moves of its own. In 2019, the agency became the first U.S. banking regulator to join the Network for the Greening of the Financial System. Last year, it named Chen as its first sustainability director.

Later in 2020, the New York agency sent a letter to state-regulated banks and credit unions outlining its expectations for managing climate risk. Those steps included designating a board member and a member of senior management as being responsible for the firm’s climate risk management, as well as incorporating climate impacts into enterprisewide risk assessment.

Then in February, the department said that banks and credit unions would be able to earn state Community Reinvestment Act credit for financing climate resilience projects in low-income areas.

Linda Lacewell, who was superintendent at the time, resigned in August. She was succeeded on an acting basis by Adrienne Harris, who was nominated for the post by Democratic Gov. Kathy Hochul.

“This new division and Nina’s appointment position DFS at the forefront of climate-related financial supervision, fulfilling DFS’ mandate to ensure the safety and soundness of our regulated companies as they manage the financial risks from climate change, and support the roles of our institutions in advancing the low-carbon transition and enhancing communities’ resilience,” Harris said in a statement.

In an interview, Chen said that she is currently in the midst of adding two new staff members to support the division, which would essentially elevate the climate-related work the agency has done to date. The department has been helping regulated financial institutions to understand better what climate risk might look like for their organization and how they might participate in financing a transition to a low-carbon economy.

For instance, the Department of Financial Services has collaborated with other New York state agencies, including the Department of Environmental Conservation and the Energy Research and Development Authority, to educate community bankers on topics such as the specific impacts of climate change on the Northeast United States.

“On the banking side,” Chen said, “people have asked us, we know there's physical risk, but what does that mean? What does it mean for New York community banks who don’t have climate scientists on staff?”

Physical risk refers to the risk of losses resulting from climate events — for example, a commercial property in a bank’s portfolio might suffer heavy damages during a rough hurricane season, hurting the borrower’s ability to repay. Banks are also assessing transition risk, or the risk of losses that may arise from a transition to a low-carbon economy.

Chen, who previously worked at the nonprofit Nature Conservancy as its director of conservation investments in New Jersey and then New York, said that one of her top priorities will be seeking to ensure fair access to financial services for low-income communities disproportionately affected by climate change.

The Department of Financial Services currently regulates more than 1,400 banking and other financial services companies with assets totaling more than $2.9 trillion, plus almost 1,800 insurance companies with assets of around $5.5 trillion. “We have some of the most sophisticated insurers and banks, as well as smaller organizations that are just getting started in this journey,” Chen said.

Separately on Wednesday, the department unveiled proposed changes to New York's Community Reinvestment Act. The pending amendment specifies how state-regulated banks must collect data about loans to minority and women-owned businesses and the ways in which they must report the information to state officials.

The proposed changes come nearly 18 months after the agency notified banks of plans to evaluate them on the extent to which they make credit available to minority- and women-owned businesses. The public will have 60 days to comment on the pending regulation.

Allissa Kline contributed to this story.