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U.S. regulators’ efforts to bolster banks’ treatment of climate-related financial risk will strengthen risk management and transparency in this area, says DBRS Morningstar.

In a new report, the rating agency said U.S. bank regulators are expected to release a joint set of final guidance on climate-related risk management by the end of 2023, which should help banks develop coherent policies for managing climate risk and improving disclosure.

The Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have all published separate proposals on climate risk management for consultation in recent months.

DBRS said it now expects them to issue joint guidance by the end of this year that will apply to banks with more than US$100 million in assets.

“While we believe that most large banks already consider climate related financial risks in their underwriting and risk management frameworks, the proposals would likely strengthen bank risk assessments, while increasing transparency,” the report said.

As it stands, the affected banks have made varying levels of progress on policies to address climate-related financial risk, the report noted, with the big global banks introducing climate and ESG goals, and joining industry initiatives to reduce emissions and meet global disclosure standards.

Regional banks that would be affected by the new guidance “are at varying levels of readiness, but we expect any requirements to be phased in over a reasonable time period that would be manageable for all affected banks,” it said.

Based on the comments the regulators’ proposals have received, DBRS said it expects the final version will soften certain specific recommendations, and that any new requirements will be subject to transition periods.

Additionally, the final guidelines will likely face legal challenges from industry lobby groups, it noted.

Once the new guidance is adopted, the U.S. would “still be behind some developed market peers in terms of introducing climate related financial risk tools and guidelines from the regulators, but it is a start,” DBRS said.

The larger banks already operate in multiple jurisdictions, it added, “requiring them to meet more stringent jurisdictional standards in the U.K. and in Europe.”