The gatekeepers of financial markets should embrace smarter climate-change technology, accessible risk data, and consider a call for taxes or emissions-cutting rules and incentives, all as part of a broad portfolio of actions to measure and protect against climate change, an oversight group said in the first report of its kind Thursday.
Ignoring a multistep approach on climate change is ignoring this “emerging threat to the financial stability of the United States,” the Financial Stability Oversight Council (FSOC) said in its report assessing the Securities and Exchange Commission, the Federal Reserve and more. The report summed up known risks and accelerated action in just the past year. The council then recommended next steps.
“While progress has been made, there is a substantial amount of work yet to be done,” the report said.
Some observers said the report opened the door to stricter regulation.
“To unlock that Dodd-Frank power, we need to establish climate as a systemic risk. On this the FSOC was unequivocal — it is a threat to the financial system and all agencies in the FSOC, including the Fed, agreed,” said Justin Guay, director of global climate strategy at the Sunrise Project, in a tweet. “That unlocks regulatory power. That’s a big deal.”
The FSOC was formed under the Dodd-Frank Wall Street reform act in the wake of the financial crisis more than a decade ago. It has since boosted its attention on climate change, especially after a call for a whole-of-government approach toward efforts to slow global warming by the Biden administration. Treasury Secretary Janet Yellen chairs the group.
Too many reporting gaps
Filling in data gaps will improve financial market performance and cut down on mispriced assets, the report said. Such data might cover impending or already realized risks for more frequent storms, droughts, or rising seas, and will better expose, for instance, the likelihood of supply-chain disruptions, a flooded-out loan portfolio, or the initial expense and long-term savings from a company’s switch to renewable energy. Such data, more uniformly anticipated and reported, as well as shared with international counterparts, will allow for healthier markets
the council said.
The emphasis of the report and the group’s work is to drive better information into the market, improve market efficiency and enhance market discipline, a senior official who worked on the report said.
Agencies have “muscle memory” when it comes to using financial data, but the group aims to build up that muscle memory on climate data too, the official said. Private-sector reporting on such risks is getting the job done, the official said, but suggested there is a “public utility” aspect to access for sharable data and that government has a role in pushing such availability.
Among the recommendations is a special advisory committee including scientists, Wall Street executives, business and labor leaders, environmentalists and others to help develop standards for monitoring the economic impacts of climate change.
“Failure to mitigate the financial system’s vulnerability to and exacerbation of climate change could lead to an economic catastrophe of the same magnitude as the 2008 financial crisis,” said Andres Vinelli, vice president for economic policy at the left-leaning Center for American Progress. “The FSOC report is a crucial first step toward implementing a robust climate financial regulatory agenda.”
Off to Glasgow
At minimum, a closer alliance presented in the report for diagnosing and reporting climate-change risk for financial markets may help President Biden’s standing at the pivotal U.N. climate-change talks (COP26) that kick off in Glasgow in a little more than a week.
Biden’s attempt to push the U.S. toward cleaner energy and a 50% cut in emissions by the end of the decade, relying heavily on legislation, has hit a bump in congressional budget and infrastructure bill negotiations. That leaves the president in a defensive position as he huddles with other global powers who will want the U.S., the largest polluter behind China, to boost its commitment to action.
Senior policy leaders who worked on the FSOC report emphasized the importance of the breadth of its 15 member agencies, that in addition the SEC and the Fed, extend to insurance, housing and banking supervisors, and others. A senior official said the permanence of the committee and a focus on accountability allows for tracking and forming policy around climate-change risks that will be more lasting than efforts by a simple working group.
The SEC has collected public comments and is mulling rulemaking on climate-change risk disclosures for investors by the publicly traded companies under its watch. For example, many CEOs accept that SEC disclosure rules are likely coming, but want to report climate risks separate from their traditional earnings reports, they’ve said. Others push for different reporting standards depending on company size. A senior official who worked on the FSOC report said SEC action could potentially facilitate disclosure action across agencies.
The council said it supports SEC efforts toward requiring more disclosure from funds and others that make claims their investments align with environmental, social and governance (ESG) themes that have spiked in popularity.
A coalition of major banks said it generally supported the report’s findings and calls to action, although emphasized a desire that reporting requirements aren’t one-size-fits-all.
“It is imperative that financial regulators recognize that every bank is different with its own unique business model and customer base, requiring an individualized approach to climate risk management,” said Kevin Fromer, president and CEO of the Financial Services Forum. The forum is an economic policy and advocacy organization whose members are the CEOs of the eight largest and most diversified financial institutions headquartered in the U.S.
A major scientific report released by the U.N. in August argued that countries must immediately shift away from burning fossil fuels or risk an ever-hotter future that packs intense heat waves, water shortages, damaging storms, rising seas and biodiversity loss that could bring more frequent pandemics.
Scientists have long said that the average global temperature must not increase beyond 2 degrees Celsius, and ideally, no more than 1.5 degrees Celsius, above preindustrial levels. But as countries continue to pump carbon dioxide into the atmosphere, the average global temperature has already risen by about 1.1 degrees Celsius.