US financial regulators have yet to implement climate risk rules, report finds

US financial regulators have not yet implemented climate-related financial risk rules although they are making some progress, an analysis from sustainable finance advocates Ceres has found.

The report assessed 10 federal financial regulators including the Federal Reserve and Securities and Exchange Commission (SEC) and found they have implemented over 100 actions since 2022 that address climate change risk.

However, US regulators should take more concrete action in order to prevent the next banking crisis, the report found.

“Without these tools, institutions and the market cannot make any meaningful, coherent progress, exposing our entire financial system and the people that rely on it to disorderly, unpriced risks,” the Ceres report stated.

The financial risks from climate change have put financial institutions in a vulnerable place, said Steven Rothstein, managing director of sustainable capital markets at Ceres.

“The interconnectedness of the US financial system means risk and climate events can trigger cascading crises that undermine the integrity of the entire economy,” he said.

More action taken this year

The Treasury Department and Federal Housing Finance Agency have taken the most action over the past year, while the Public Company Accounting Oversight Board (PCAOB) made very little progress, Ceres said in its report.

Nine of the regulators analysed had affirmed that climate change is a systemic risk which could adversely impact the financial sector as well as the broader economy. The PCAOB was the only agency not to affirm the risks from climate change.

The report also found that all but two regulators had improved transparency on measuring and managing climate-related risks.

Ceres noted that the SEC has made an effort in its response to its proposed landmark rule that would require mandatory climate disclosures from listed companies. The SEC is expected to finalise its disclosure rules in October, but Congress is getting impatient. A group of House Democrats wrote to the SEC chair Gary Gensler to urge him to take action quickly, while many Republicans have opposed the rule, claiming it exceeds the SEC’s authority.

The Fed lags behind other central banks

The Ceres analysis found that the Fed had reached a milestone by announcing the first climate-related scenario analysis exercise but noted it was lagging behind other countries – at least 31 central banks around the globe have already or are conducting a climate scenario analysis or stress tests.

“These exercises vary in approach, scope, and coverage, but many are more complex than the Fed’s pilot, and some may also have capital consequences depending on the results,” the report found.

Ceres provided a number of recommendations to each agency based on their current progress, including the Fed which has been advised to:

• affirm climate as a systemic risk;
• expand internal climate-related capacities;
• increase its transparency regarding climate-related risk management;
• produce research and data on climate risk;
• improve climate-related disclosures;
• and include climate risk in regulation.

“The sector needs to better integrate climate risk into its supervision of financial entities and put stronger practices in place to assess the consequences of the climate-related scenarios that will arise unless we make systemic changes,” Rothstein said.