US regulator warns of climate risk in ‘dark markets’

December 20, 2021|Written by David Clarke|Federal Reserve

A top US regulator has warned that polluting companies may increasingly turn to unregulated markets for financing as tighter climate rules are applied to mainstream banks and investors.

Caroline Crenshaw, a commissioner at the Securities and Exchange Commission (SEC), told a webinar hosted by Sierra Club and the Center for American Progress (CAP) that this is a concern for the agency as it prepares a new climate rule due to be published next year.

“As we all work to shine a light on these risks to our financial system and formulate plans to address them, we should also work to ensure that the externalities high-carbon emitters put on our environment and in our capital markets do not find relative safe haven in areas of darkness, least resistance, and lowest cost,” she said.

The application of new disclosure requirements, alongside other measures to mitigate climate risks, are not directly aimed at increasing the costs faced by carbon-heavy borrowers. Instead, they are intended to allow lenders and investors to work with firms to align their activities with a decarbonised economy. But experts have pointed out that higher financing costs are inevitable for high-carbon clients that fail to keep pace with the transition.

In stating that climate risk regulation must be extended to the regulation of private markets, Crenshaw echoed a recent CAP paper, which called on regulators to use prudential tools to limit banks’ ability to facilitate climate risks migrating to the shadow banking sector. The authors noted that the sector relies heavily on financial support from the mainstream banking system.

Crenshaw said that, although the SEC is actively considering these concerns, it is possible its current toolkit may be insufficient.

“Historically, Congress has acted when the opacity of the private markets turns into darkness,” she added.

Speaking on the same subject in October, the Bank of England’s deputy governor Dave Ramsden expressed more optimism that tightening climate rules on banks will not lead to increased financial flows towards unregulated institutions.

He said regulators were focused on ensuring non-bank finance is safe and playing a positive role in meeting key macroeconomic objectives, including addressing the climate crisis.

This page was last updated January 5, 2022

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