US regulators assess climate’s risk to financial stability

August 6, 2021|Written by Graham Caswell|Federal Reserve

US Treasury Secretary Janet Yellen will lead a regulatory review to assess climate-related risks to US financial stability, the former Federal Reserve Chair told the Venice International Conference on Climate on Sunday. The Financial Stability Oversight Council (FSOC) will “outline a whole-of-government process to assess climate risk to the U.S. financial system and federal government,” she said, focusing her remarks on financial-related risk disclosures.

A May Executive Order from President Joe Biden gave US financial regulators 180 days to come up with recommendations on reducing climate-related risks to financial stability, and specifically tasked Yellen to work with the FSOC. Chaired by Secretary Yellen, the council has a statutory mandate to identify and respond to risks threatening financial stability, but it has yet to meaningfully engage on climate change. The FSOC has ten voting members including Fed Chair Jerome Powell, SEC Chair Gary Gensler, Acting Comptroller of the Currency Michael Hsu, and the heads of five finance-related federal agencies.

“The executive order made clear this administration’s policy to advance the disclosure of climate-related financial risks, which we will explore through FSOC,” Yellen said. “The current financial reporting system is not producing reliable disclosures. We also need consistency of reporting frameworks over time, as well as comparability across firms and jurisdictions, providing the useful information that investors need to make informed decisions.”

Days after Secretary Yellen’s remarks, US Senators Elizabeth Warren (D-Mass), Kirsten Gillibrand (D-NY), and Chris Van Hollen (D-Md) released an open letter to Treasury Climate lead John Morton, seeking information on how the Department will coordinate FSOC in response to Biden’s recent Executive Order.

“Given that the FSOC is comprised of a mix of regulators – at both the federal and state levels – with potentially differing priorities, it is imperative that you wield your leadership position in the Climate Hub to … align these financial regulators and implement strong guidelines to ensure that banks and financial institutions, which continue to finance risky fossil fuel investments, are adequately prepared for climate-related disruptions,” the Senators said.

Influenced by the climate denial of former President Donald Trump and the GOP, the US financial regulators represented on FSOC have been slow to recognise the risks and responsibilities associated with climate change. The Fed identified climate change as a potential risk only last November and was the last major central bank to join the Network for Greening the Financial System. The Department of the Treasury Climate Hub was only announced in April and the administrator of the US federal banking system – the Office of the Comptroller of the Currency –  has just made its first ‘Climate Change Risk Officer’ appointment this week.

The US Securities and Exchange Commission (SEC) announced an Enforcement Task Force on climate and ESG issues last March, and has just completed a public consultation on climate-related financial disclosures. SEC Chair Gary Gensler has promised to “develop a mandatory climate risk disclosure rule proposal” by the end of the year.

Climate campaigners and civil society groups have been critical of the slow pace of the US regulators response to climate change. “The lack of any visible or concrete action from Treasury’s Climate Hub is a deep concern,” said Amazon Watch Climate and Finance Director Moira Birss. “We cannot afford to repeat the mistakes that allowed the Great Recession to raze our economy just over a decade ago,” said Evergreen Action Campaigns Director Lena Moffitt, calling for meaningful action from the Treasury Department and other regulators.

Although US President Biden and Climate Envoy John Kerry express ambitions to lead the world on climate action in the months before COP26, American financial regulators have yet to move beyond research and the establishment of committees and remain well behind their international peers in responding to the climate emergency.

This page was last updated August 6, 2021

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