On October 16, the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency jointly “.. announced the withdrawal of their interagency Principles for Climate-Related Financial Risk Management for Large Financial Institutions.”

This is a positive and, frankly, refreshing development, a rare instance of government appropriately narrowing its focus and returning to its statutory mission. The decision, effective immediately, recognizes that banking regulation is not the right tool to fight climate change.

What Happened

In their joint release, the threesome explained:

“The agencies do not believe principles for managing climate-related financial risk are necessary because the agencies’ existing safety and soundness standards require all supervised institutions to have effective risk management commensurate with their size, complexity, and activities.”

In short, the existing regulatory framework already obligates banks to manage all material risks. There is no need nor a rational basis for a bespoke climate overlay.

The Background

The now withdrawn 2023 guidance would have applied to banks with more than $100 billion in assets (.. being the banks the large majority of Americans do business with), requiring the boards of directors to explicitly incorporate climate risk into their long term planning. While environmental advocates applauded the move, financial institutions and many regulators expressed concern that the agencies had gone far beyond their statutory authority.

As Federal Reserve Governor Chris Waller aptly observed, the risks posed by global climate change are not “sufficiently unique or material to merit special treatment relative to other risks.” And Vice Chair for Supervision Michelle Bowman warned that the principles “far exceed the narrow mandate of the Fed, which is stable inflation and maximum employment.”

The Federal Reserve’s purpose is not to manage the Earth’s climate. Its role is to safeguard U.S. monetary stability and the financial system. Using unelected banking regulators to steer capital away from carbon intensive industries, or to penalize banks for financing them, is mission creep, if not a whole lot more.

The Problem with Mission Creep

When the Federal Reserve or its sister agencies wade into politically charged territory, particularly one that is beyond their ability to meaningfully influence, the result is distraction, inefficiency, and, often, unintended harm.

During the pandemic, for example, the Fed missed its inflation target while devoting disproportionate attention to distributional and social objectives. The delayed rate hikes that followed arguably contributed to entrenched inflation. Expanding the Fed’s purview to climate policy risked repeating that error: chasing objectives outside its lane while losing focus on its core responsibilities.

Moreover, financial institutions are already required to manage risk. They assess credit, liquidity, operational, market, and reputational risks daily. If climate risk is truly material to a bank’s balance sheet, it will already be factored into those calculations. If it isn’t material, forcing it into regulatory frameworks distorts price signals, misallocates capital, and potentially constrains legitimate lending.

Unintended Consequences of the Withdrawn Guidance

The now rescinded principles introduced uncertainty and additional compliance burdens without a clear quantifiable benefit. Banks were expected to conduct “long-term scenario analysis” extending far beyond the horizon of traditional financial modeling, often decades into the future.

But financial regulation must rest on measurable, near term risks. Predicting the financial implications of climate trends 50 years from now is inherently speculative (.. and yes, we have undertaken that conjectural scenario analysis for clients). Worse, the vague language in the 2023 principles meant institutions faced unclear expectations and the risk of ever tightening oversight.

The “transition risk” framework, in which banks were expected to treat carbon intensive businesses as inherently riskier, posed particular problems. It effectively sought to constrain lending to lawful industries through regulatory pressure rather than through transparent legislative action. That is not the role of a prudential regulator.

The predictable result would have been reduced credit availability and higher borrowing costs for energy producers, manufacturers, and even home builders, not because of actual credit risk, but because of regulatory signaling. That is policymaking by proxy, not risk management.

The Correct Course

By withdrawing the climate risk guidance, the Fed, FDIC, and OCC have reaffirmed a crucial principle: regulators must operate within their mandates. Prudential oversight should focus on the safety and soundness of the U.S. banking system, not on climate policy objectives.

This does not mean banks should ignore climate related factors. To the contrary, financial institutions must continue to identify, measure, and manage all material risks, including those arising from environmental conditions when relevant. But they should do so within the existing risk management frameworks, not under the weight of politically charged, redundant guidance.

The rescission also helps restore the credibility of financial regulators by signaling restraint. Regulatory sprawl undermines confidence; disciplined focus restores it.

A Broader Shift

This action aligns with the current administration’s broader rollback of climate related mandates across federal agencies. In recent months, executive orders have rescinded prior climate initiatives, the SEC has halted its defense of its climate disclosure rule, and several federal departments have eliminated previously articulated ESG driven programs.

At the same time, many financial institutions are unwinding voluntary commitments such as membership in the Net Zero Banking Alliance, which formally disbanded this month after widespread withdrawals by global banks.

Even climate advocate Bill Gates recently wrote that the “doomsday view” of climate change is wrong, and “it’s diverting resources from the most effective things we should be doing to improve life in a warming world.” That realism, not resignation, is the current proper mindset.

Staying Grounded in Law and Economics

Environmental lawyers understand addressing climate change. But we also understand that sound environmental policy must be grounded in law, not aspiration. It is not the Fed’s job to impose environmental schemes through the back door of financial supervision.

Climate risk belongs where it can be measured and managed, in environmental law, in energy policy, and in the marketplace of ideas and investment. Banks should evaluate it as part of their general risk frameworks, not as a special category elevated by politics.

Conclusion

The withdrawal of the interagency climate risk principles is not a rejection of environmental stewardship. It is a reaffirmation of disciplined governance.

The Federal Reserve, FDIC, and OCC have rightly recognized that their role is to ensure financial stability, including increasingly in non bank transactions in bitcoin and Stablecoin, not to dictate global environmental outcomes. Climate change is real, but it is not a financial crisis, and it should not be treated as one by bank supervisors.

By refocusing on their statutory mandates, regulators can strengthen both financial and environmental outcomes: a stable banking system and a more honest, effective dialogue about how best to protect human health and the environment, in the right forums, through the right tools, and for the right reasons.

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Join us for the next in our webinar series at the Intersection of Business, Science, and Law, “From Boilerplate to Benchmarking: The New Era of Greenhouse Gas Lease Provisions” on Tues, Nov 18 at 9 am. The webinar is complimentary, but you must register here.