FSOC climate report recognises systemic risk but avoids firm timelines

October 22, 2021|Written by David Clarke|Bank of England, European Central Bank, Federal Reserve

A much-anticipated report on US regulators’ handling of climate-related financial risk has recognised the systemic threat posed by the climate crisis, but stopped short of recommending the proactive interventions and firm timelines some climate advocates had hoped for.

The report, published by the Financial Stability Oversight Council (FSOC) under the leadership of Treasury Secretary Janet Yellen, represents the all-but-unanimous view of the nation’s top financial regulators.

“For the first time, FSOC is recognising that climate change is an emerging and increasing threat to US financial stability,” Yellen said in a statement. “This report puts climate change squarely at the forefront of the agenda of its member agencies”.

The report includes a series of recommendations on improving the standards of climate disclosures, gathering data, and integrating climate considerations into supervisory guidance. But it avoids recommending firm timelines for regulators to take action, and gives no consideration to some of the bolder interventions adopted by regulators in other G20 economies.

Climate advocates and public interest groups, such as Public Citizen and Americans for Financial Reform, had hoped the report would look at factoring climate risk into capital requirements and concentration limits. It was revealed today that similar measures are under consideration by the European Central Bank (ECB).

“Despite the fact that the Dodd-Frank bill gives FSOC members the power and the responsibility to rein in Wall Street’s reckless fossil fuel financing, FSOC opts for less impactful measures.” said Evergreen Action campaigns director Lena Moffitt in a statement responding to the report. “They can, and must, use this report as a springboard, not as a ceiling—now, we are looking for clear direction from FSOC as to when and how they will be taking additional steps.”

The report comes after the publication last week of a climate risk roadmap by the White House, which argued that a lack of perfect information should not be an excuse for inaction on climate risk. “The potential for irreversible climate impacts demands a precautionary approach,” the White House report said.

This endorsement of a precautionary approach is echoed in more muted language in the FSOC report. “Council members recognize that the need for better data and tools cannot justify inaction, as climate-related financial risks will become more acute if not addressed promptly.” the authors write.

The report mentions the usefulness of climate stress tests, but does not recommend incorporating climate risk into the stress tests banks are periodically required to run. The authors say that climate scenario analysis has been a useful experience in other countries, and that it helps institutions, regulators, and supervisors to identify data and modelling needs.

Although the report does not announce any major new policy measures and is largely an overview of current efforts, Yellen was keen to stress there would be more developments to come.

“It’s important to know that this report is not exhaustive. It is not the final word from this body. Instead it is just a first step.” she told Thursday’s FSOC meeting. “We expect to form new strategies to address this emerging crisis.”

The report tasks regulators with undertaking reviews on a wide range of areas, including regulation, guidance and reporting requirements on climate-related risk.

FSOC will enhance its own capacity to study the topic, including via the creation of a new Climate Related Financial Risk Committee, with the job of identifying priority areas for mitigating climate risk and issuing a semi-annual report.

The release of the report comes ahead of the Cop26 climate summit, where some other countries will be able to demonstrate more rapid progress on aligning financial regulation with the threat posed by climate change.

Earlier this week, the UK government issued its Greening Finance roadmap which commits to set out new requirements for big companies to outline net zero transition plans. In addition, the ECB released the results of its first economy-wide climate stress test last month.

This page was last updated October 26, 2021

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