A demonstrator holds a banner during a protest outside the Bank of England, as the UN Climate Change Conference (COP26) takes place, in London, Britain, November 6, 2021.
A demonstrator holds a banner during a protest outside the Bank of England, as the UN Climate Change Conference (COP26) takes place, in London, Britain, November 6, 2021. Reuters / HENRY NICHOLLS

U.S. banks this week welcomed a regulatory proposal to incorporate climate change risks into their daily operations, yet said they opposed prescriptive risk management and lending criteria, exposure disclosures and capital penalties.

Banks pushed back on the suggestion by President Joe Biden's administration that they should be required to report climate risk exposures publicly or to regulators. They noted that many banks are already engaged in voluntary reporting efforts.

Environmental groups and climate activists are pressing governments and corporations to intensify planning for the effects of climate change such as rising sea levels, worsening floods and fires. These disasters, along with policies transitioning away from carbon-heavy industry, could destroy trillions of dollars of assets around the globe.

U.S. banks also face intensifying pressure to reduce lending to oil companies, pipelines and other fossil fuel producers. Many lenders have pledged to transition away from fossil-fuel lending.

In December, the Office of the Comptroller of the Currency (OCC) sought feedback on draft guidelines requiring banks to incorporate climate change risk across their businesses.

The sweeping proposal applies to lenders with over $100 billion in assets. It touches on everything from board room governance, liquidity, credit and operational risk management, to the way banks project hypothetical future losses on their books and their ability to service poorer communities.

Responses to the proposal were due Monday. In them, groups representing JPMorgan Chase, Goldman Sachs Group, Morgan Stanley and Bank of America among others staked out positions on hot-button climate risk issues that Biden's regulators have zoomed in on.

Chiefly, banks called for the OCC to take a flexible principles-based stance, given the complexity of identifying, gathering and modeling financial and non-financial climate-related data over a range of long time horizons.

"It would be premature...to require banks to establish and apply quantitative limits or thresholds for climate-related financial risk," the Bank Policy Institute (BPI).

It recommended allowing banks to develop and adapt internal risk criteria and decide how to integrate climate risks into their existing risk-management framework. It opposed prescriptive lending limits.

Citing data and modeling challenges, the industry rejected the notion that lenders' climate change risk assessments should affect capital or liquidity.

While banks should assess how their books would perform under different climate change scenarios, the groups said climate change risks should not be added to stress tests that determine bank capital plans.

"It would be inappropriate for banks to experience adverse regulatory consequences as a result of quantitative assessments that rely on currently available data and methodologies," wrote the Financial Services Forum which represents the largest eight U.S. banks.

As for lending to the oil and gas industry, BPI said lenders should be allowed to support clients transitioning to low-carbon business plans. For instance, some producers are cutting greenhouse gas emissions at wells and pipelines or investing in carbon-capture technology.

The Institute of International Finance also warned that regulators' increasing focus on climate risks, in particular pilot scenario analyses being conducted by multiple countries, was sucking up resources banks should be devoting to internal capacity building.

"It would therefore be helpful...for supervisors to take an explicitly proportionate, phased, and incremental approach," it wrote.