Yellen comments prompt defence of FSOC’s climate role

July 29, 2022|Written by David Clarke|Securities & Exchange Commission, Reserve Bank of India, Federal Reserve

Civil society express deep concerns about Yellen’s comments on the FSOC, India’s banks lags behind on climate risk, and more from this week in green central banking.

Yellen: FSOC not “a direct tool to address climate change”

Climate advocates have fiercely restated the responsibility of US financial regulators to help fight climate change, after Treasury secretary Janet Yellen suggested the Financial Stability Oversight Council (FSOC) does not have a role in doing so.

Yellen told the Washington Post this week that the FSOC is “mainly concerned with evaluating the risks of climate change for financial stability” and is not “a direct tool to address climate change”.

Her comments prompted an immediate backlash from climate advocates. Ben Cushing, a campaigner at the Sierra Club, described Yellen’s position as an “abdication of leadership”, particularly in light of the Biden administration’s promise to take an “all of government” approach to tackling the climate crisis.

The FSOC was established in the aftermath of the 2008 financial crisis to respond to emerging risks to the stability of the US financial system. In a landmark report last year, it described climate change as a systemic threat to financial stability, and outlined a series of recommendations to its member agencies.

Some of the most impactful of these measures – such as introducing climate stress tests and including climate risk in routine bank exams – have still not been given firm timelines by the relevant regulators.

Climate advocates have argued that the FSOC and its members should take a precautionary approach to managing climate risk, and proactively facilitate the alignment of lending and investments with the green transition. Both the FSOC and the White House have acknowledged that a lack of perfect information about how climate risks will manifest themselves should not be used as a justification for inaction.

US Treasury to establish climate risk research hub

The US Treasury has revealed it is launching a new initiative to provide financial regulators with the data, tools and software they need to more precisely assess the threat that climate change poses to the financial system.

The move was announced as part of a factsheet published yesterday on the progress of FSOC members in implementing the recommendations laid out in November’s landmark climate risk report.

The Climate Data and Analytics Hub will sit within the Treasury’s Office of Financial Research. Among its functions will be to allow regulators to integrate data regarding a variety of physical risks such as wildfires, crop conditions and precipitation in order to better understand the links between climate change and financial stability risk.

Nellie Liang, under-secretary for domestic finance, said that climate data and financial data are often siloed, and that it is hoped the project will help streamline regulators’ access to critical information providing a new, more comprehensive view of climate-related financial risks.

India’s banks lagging behind on climate risk

India’s banks are lagging behind their peers on action related to climate risk and sustainable finance, according to the country’s central bank. Survey results published this week show that only a third had assigned board-level responsibility for climate initiatives, and just a handful had attempted to quantify the climate risk exposure of their portfolio.

The Reserve Bank of India (RBI) conducted a survey of 34 commercial banks in January to assess their preparedness for physical and transition risks related to climate change.

In a discussion paper accompanying the survey, the RBI suggests financial institutions should scale up green lending and voluntarily set up green finance targets to mitigate risks arising out of climate change. It recommends banks set incremental targets for green finance over the short, medium and longer term towards certain identified sectors, which are then reviewed annually.

The RBI is seeking feedback on the proposals until 30 September 2022.

ESG ratings criticised

An article in the Economist offers an excoriating critique of the environmental, social and governance (ESG) industry, arguing that it has had a negligible impact on greenhouse gas emissions. In particular, it highlights the inconsistency in the metrics applied by ratings agencies.

“The ESG rating agencies are the veritable acme of inconsistency,” writes Henry Tricks. “A study of six of them found that they used 709 different metrics across 64 categories. Only ten categories were common to all – and they do not include such basics as greenhouse gas emissions.”

However, Tricks observes that tighter regulatory scrutiny of firms’ ESG claims is on the way, in particular via plans by the US Securities and Exchange Commission to boost oversight of climate disclosures.

“The hope is that greater supervisory pressure will eventually help capital markets to ‘internalise externalities’ – i.e. to reward companies for reducing their carbon footprints through higher asset prices and a lower cost of capital.”

This page was last updated August 3, 2022

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