Amid intensifying attacks from Republican lawmakers, US treasury secretary Janet Yellen has repeatedly asserted that climate action falls within regulators’ mandates.
She also said that the Financial Stability Oversight Council (FSOC), of which she is chair, is paying attention to transition risks other than those arising from changes in government policies, after a Democratic representative raised concerns that such factors could be overlooked. These include risks stemming from shifts in consumer preferences and technology.
Yellen was fielding questions from the Senate banking committee and the House financial services committee. During the session, she sought to reassure Republican senators who suggested the FSOC’s climate actions would undermine domestic energy production.
“Our grandchildren won’t be able to have an inhabitable planet if we don’t address the risks from climate change,” she said. “We should not lose our focus on the need to transition as rapidly as possible on a path to a future where fossil fuels play a much less important role.”
She said financial institutions themselves were on board with such a move, with most major US banks committed to aligning their activities with global climate goals as part of the Glasgow Financial Alliance for Net Zero.
She also defended the new rule on climate disclosures proposed by the Securities and Exchange Commission (SEC), stressing the value of making more data available to different actors within the system.
“I think we need private-sector actors, including financial institutions, to be taking the long view, and we need to make sure that they have the information that they need to evaluate their own risks, that supervisors and regulators need to be evaluating those risks, as well,” she stated.
Following suggestions that the SEC’s rule would inappropriately influence the allocation of capital away from certain sectors, Yellen said that more comprehensive climate disclosures are actually necessary to ensure capital is allocated in the right way.
“Without this kind of disclosure of climate-related risks, we’re not providing the investor community the information they need to know to allocate capital properly, so I’m very supportive of the SEC proposal to require disclosure of climate-related risks by firms.”
Yellen’s comments are supported by recent polling which found that the vast majority of US retail investors support the SEC’s proposal to require public companies to disclose standardised information about their climate-related financial risks. The survey found that investors have little faith that disclosures will be of sufficient quality unless they are backed up by regulatory oversight.
Rashida Tlaib, a Democratic representative from Michigan, noted that in a previous congressional hearing Federal Reserve chair Jerome Powell characterised climate transition risks as those arising from changes in government policy, neglecting to mention other kinds of transition risk. Tlaib suggested this was an overly limited view.
Yellen confirmed that transition risks could also relate to rapid changes in consumer preferences or technological shifts. The FSOC report on climate risk listed disruptive business models as a further category of transition risk that could materialise.
Tlaib expressed concern that the actions of financial institutions are failing to live up to the voluntary commitments they have made to align their portfolios with the Paris climate agreement. She pointed out that the world’s top banks issued loans worth $742bn to the fossil fuel industry in 2021, more than in 2015 when the Paris Agreement was signed.
Yellen has previously said the Treasury will monitor institutions’ pledges closely, and under the proposed SEC rule institutions will have to explain how they are meeting any climate-related commitments they have made.
Tlaib stressed the need for robust regulatory action to change banks’ behaviour. “They’re talking about it but they’re not doing it,” she said.
This page was last updated May 23, 2022
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