Climate Finance Glossary

Regulatory Agencies / Processes & Terms / Regulatory & Risk Management Tools / Other Bodies / Footnotes

Regulatory Agencies

Federal Reserve Board (The Fed) – supervises and regulates the banking industry to provide overall stability to the financial system. A key mandate of the Fed is to assess and account for risks to the U.S. economy.

U.S. Treasury (Treasury) – Key functions of the U.S. Treasury include printing bills, postage, and Federal Reserve notes, minting coins, collecting taxes, enforcing tax laws, managing all government accounts and debt issues, and overseeing U.S. banks in cooperation with the Federal Reserve. The secretary of the Treasury is responsible for international monetary and financial policy, including foreign exchange intervention. The Treasury Secretary chairs FSOC.(1)

The Securities and Exchange Commission (SEC) – works to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. SEC enforces US security laws which are designed to ensure investors have accurate information regarding the interests they are buying.(2)

Federal Deposit Insurance Commission (FDIC) – an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures. The FDIC was created in 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices. As of 2020, the FDIC insures deposits up to $250,000 per depositor as long as the institution is a member firm.(3)

The Office of the Comptroller of the Currency (OCC) – a federal agency that oversees the execution of laws relating to national banks. Specifically, it charters, regulates, and supervises national banks, federally chartered savings associations, and federal branches and agencies of foreign banks in the U.S. The Comptroller of the Currency, appointed by the President and approved by the Senate, heads the OCC.(4)

Financial Stability Oversight Commission (FSOC) – The FSOC was established by the Dodd-Frank Act in 2010 as a way to protect the US economy from the actions of large banks that led to the Great Recession. Many Americans were outraged in 2008 after the financial sector received a bailout from the US government; the FSOC helps hold these large institutions accountable. The FSOC is required by Dodd-Frank to identify potential threats to the US economy’s stability and publish their findings in a public annual report. The Council is composed of 10 voting and five non-voting members. Other voting members include the chair of the SEC, the chair of the FDIC, the Director of the Federal Housing Finance Agency, the Director of the Consumer Financial Protection Bureau, and other insurance and financial regulation experts within the US government. The US Treasury Secretary is the head of the FSOC.(5)

The Federal Insurance Office (FIO) – a federal agency that exists within the U.S. Department of Treasury. The FIO was created after the 2007-2008 financial crisis. It advises the Treasury Department and other federal government agencies on all matters relating to insurance and the insurance industry. This includes ensuring that everyone in the country has access to affordable insurance products.(6)

The Department of Labor (DOL) – a cabinet-level agency responsible for enforcing federal labor standards and promoting workers’ well-being. The office is headed by the secretary of labor.(7)

Climate Financial Regulatory Processes & Terms

Climate-related financial risk – risks that may result from climate change or from efforts to mitigate climate change, that could impact the safety and soundness of individual financial institutions and our financial system as a whole.(8)

Physical risks – the harm to people and property arising from acute, climate-related events, such as hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, including higher average temperatures, changes in precipitation patterns, sea level rise, and ocean acidification.(9)

Transition risks – stresses to certain banks or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes necessary to limit climate change. Such changes could strand carbon-intensive assets and affect the value of other financial instruments.(10)

Systemic risks – Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy. Systemic risk was a major contributor to the financial crisis of 2008. Companies considered to be a systemic risk are called “too big to fail.”(11)

Systemically Important Financial Institutions – “too big to fail” financial institutions whose failure would allegedly trigger severe instability or collapse an entire industry or economy.

Stranded asset – Asset that at some time prior to the end of its economic life is no longer able to earn an economic return as a result of changes associated with the transition to a low-carbon economy.(12)

Regulators – federal agencies assigned to regulate and oversee financial institutions and financial markets in the US, including the Federal Reserve (Fed), the Federal Deposit Insurance Corp. (FDIC), the Securities and Exchange Commission (SEC), and the Office of the Comptroller of the Currency (OCC). Congress has tasked financial regulators with maintaining orderly, stable, and efficient capital markets. These regulators have a key role to play in preventing adverse economic impacts and to protect communities from climate change. One of STMP’s main goals is to get them to adopt rules and policies that have the effect of moving finance away from fossil fuels.

Executive Order – An executive order is a signed, written, and published directive from the President of the United States that manages operations of the federal government. President Biden’s Executive Order on Climate-Related Financial Risk issued in May 2021 directed the Treasury, FSOC, and other agencies to produce reports and guidance on protecting the economy from climate-related financial risk, among other things.(13)

(Supervisory) tools, guidance, & principles – issued by regulators to guide financial institutions; informal and confidential in nature; agency guidance evaluating a bank’s preparedness for the risks of climate change or the methods that banks themselves use to evaluate climate risk could be implemented relatively quickly by agency examiners; can be immediately reversed with a change in administration.(14)

Rules / Rulemaking – issued by regulators to protect investors and consumers and promote financial stability; rules are subject to procedural hurdles and can take months or years to complete because they invite public feedback or enforcement penalties that can be appealed(15)

Comment Period — the range of time the public has to submit input before an agency makes a final decision on a proposed rule. In most cases, the comment period is 60 days.(16)

Request for Information (RFI) – a formal process for gathering information from potential stakeholders in a regulator’s rulemaking. RFIs are written by regulators or federal agencies and available for comments from the public, civil society, NGO’s, and the private sector. An RFI is typically the first and most broad series of requests intended to glean more guidance into how an agency should go about generation, implementing, and enforcing a new rule or regulation.

Scope 1 Emissions – greenhouse gas (GHG) emissions from sources that are owned or controlled by a company.(17)

Scope 2 Emissions – GHG emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by a company.(18)

Scope 3 Emissions – all indirect GHG emissions (not included in scope 2) that occur in the value chain of a company, including both upstream and downstream emission(19)

Environmental, social, and governance (ESG) – refers to a set of criteria that play a role in the investment decision-making process or in a company’s operations. Environmental factors consider how an investment or a company contributes to environmental issues such as climate change and sustainability. Social factors examine the social impacts of an investment or a company on communities. Governance relates to transparency and legal compliance of an investment or a company’s operations, for instance in terms of accounting and shareholders’ rights.(20)

Regulatory & Risk Management Tools

Climate-related scenario analysis – exercises used to conduct a forward-looking assessment of the potential impact on a bank of changes in the economy, financial system, or the distribution of physical hazards resulting from climate-related risks. The Federal Reserve has tapped the top six US banks to participate in a pilot climate scenario analysis for 2023.(21)

Stress testing exercises – The evaluation of a financial institution’s financial position under a severe but plausible scenario. The term “stress testing” is also used to refer to the mechanics of applying specific individual tests and to the wider environment within which the tests are developed, evaluated and used within the decision-making process.(22)

Disclosure – the timely release of all information about a company that may influence an investor’s decision. It reveals both positive and negative news, data, and operational details that impact its business. Similar to disclosure in the law, the concept is that all parties should have equal access to the same set of facts in the interest of fairness. The Securities and Exchange Commission (SEC) develops and enforces disclosure requirements for all firms incorporated in the U.S. Companies that are listed on the major U.S. stock exchanges must follow the SEC’s regulations.(23)

Capital Requirements – standardized regulations in place for banks and other depository institutions that determine how much liquid capital (that is, easily sold securities) must be held viv-a-vis a certain level of their assets. Also known as regulatory capital, these standards are set by regulatory agencies, such as the Bank for International Settlements (BIS), the Federal Deposit Insurance Corporation (FDIC), or the Federal Reserve Board (the Fed). An angry public and uneasy investment climate usually prove to be the catalysts for legislative reform in capital requirements, especially when irresponsible financial behavior by large institutions is seen as the culprit behind a financial crisis, market crash, or recession.(24)

Capital surcharge / capital buffer – mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements.(25)

Lending limit – The legal lending limit is the maximum dollar amount that a single bank can lend to a given borrower. This limit is expressed as a percentage of an institution’s capital and surplus. The limits are regulated by the Office of the Comptroller of the Currency (OCC).(26)

Macroprudential stabilizers – financial policies aimed at ensuring the stability of the financial system as a whole to prevent substantial disruptions in credit and other vital financial services necessary for stable economic growth.(27)

Microprudential stabilizers – financial policies aimed at ensuring the stability of individual financial institutions.(28)

Radical Uncertainty: climate risk is unknowable and therefore unpriceable. Conventional understandings of risk imply random outcomes with knowable probabilities. This is different from uncertainty, in which there is no basis upon which to form any calculable probability. ‘Efficient’ price discovery is not possible because of the radical uncertainty associated with climate change. So policymakers and banking regulators should take a precautionary approach.(29),(30)

Precautionary Approach: Since climate change poses a severe and potentially irreversible threat, lack of scientific certainty as to its exact nature or timing should not prevent regulatory action to mitigate its impact.(31),(32)

Double Materiality: how corporate information can be important both for its implications about a firm’s financial value, and about a firm’s impact on the world at large – particularly with regard to climate change and other environmental impacts.(33)

Other Bodies

The Financial Stability Board (FSB) – promotes global financial stability by coordinating the development of regulatory, supervisory and other financial sector policies and conducts outreach to non-member countries. FSB brings together senior policy makers from ministries of finance, central banks, and supervisory and regulatory authorities, for the G20 countries, plus four other key financial centers. The FSB is not a treaty-based organization. Policies agreed by the FSB are not legally binding, nor are they intended to replace the normal national and regional regulatory processes. Instead, the FSB acts as a coordinating body, to drive forward the policy agenda of its members to strengthen financial stability. It sets internationally agreed policies and minimum standards that its members commit to implement at national level.(34)

Task Force on Climate-related Financial Disclosures (TCFD) – The Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. The Task Force consists of 31 members from across the G20, representing both preparers and users of financial disclosures. The TCFD is chaired by Michael R. Bloomberg, founder of Bloomberg L.P.(35)

Network for Greening the Financial System (NGFS) – network of 114 central banks and financial supervisors that aims to accelerate the scaling up of green finance and develop recommendations for central banks’ role for climate change.

Basel Committee on Banking Supervision (BCBS): primary global standard setter for the prudential regulation of banks(36)

Basel III: an internationally agreed set of measures developed by BCBS in response to the financial crisis of 2007-09. Pillar 1 – Capital & Risk Coverage, Pillar 2– Risk management and supervision, Pillar 3 – Market discipline (mainly disclosure)(37)

Bank of International Settlements: support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks. BIS is owned by 63 central banks, representing countries from around the world that together account for about 95% of world GDP.(38)

Green Swan: a climate event that is outside the normal range of expected events.