On May 11, 2022, the US Federal Housing Finance Agency (“FHFA”) announced that it had joined the Network of Central Banks and Supervisors for Greening the Financial System (“NGFS”).1 The FHFA is the latest US regulator to join NGFS, and its membership is part of a trend of US regulators joining NGFS since the election of President Biden in November 2020.2 In this Legal Update, we provide background on the climate initiatives of NGFS and the FHFA and discuss what membership in NGFS may mean for the FHFA.

Background

NGFS is a global, voluntary organization made up of central banks and financial supervisors. NGFS was formed in December 2017 at the Paris “One Planet Summit” to define, promote and contribute to the development of practices within and outside of NGFS and to conduct or commission analytical work on green finance. Members exchange best practices, ideas and research related to environmental and climate risk management in the financial sector.

The FHFA regulates several of the US government-sponsored housing entities (“GSEs”) and, more generally, the housing finance markets in the United States. Since early 2021, the FHFA has been active on climate-related financial risks, most notably by issuing a request for input on the risks of climate change and natural disasters to the national housing finance markets.3 While it has not issued regulations to address these risks,4 it has committed to working with other US regulators and the entities it regulates, such as when it urged the GSEs to designate climate change as a priority concern and actively consider its effects in their decision-making.5 It also has added resiliency to climate risk as one of the criteria by which it evaluates the safety and soundness of Fannie Mae and Freddie Mac.

Consequences of Joining

Joining NGFS does not mean that the FHFA will immediately impose new obligations on the GSEs. Other US regulators that have joined the NGFS, such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, have thus far not explicitly adopted any of the NGFS best practices as requirements for US financial institutions. This has been true even in areas where there is strong alignment between NGFS initiatives and US regulatory practices, such as with respect to stress testing and scenario analysis.

However, it is likely that the FHFA will engage with NGFS on several of its initiatives. For example, NGFS has taken a leading role in developing scenarios that can be used to model the effects of climate change on various financial activities. One could imagine the FHFA looking at the NGFS scenarios as a starting point to add climate-related financial risks to the FHFA’s annual stress testing exercise.6 Further, NGFS currently is assessing how it can help to develop resources and fill potential gaps with respect to climate data.7 The FHFA, sitting at the center of the US housing markets, would seem to have both data resources and data needs that it could contribute to NGFS’s efforts. Market participants in the housing sector should consider familiarizing themselves with NGFS and its initiatives so that they are able to provide informed and constructive feedback to the FHFA.