Climate Roadmap for US Financial Regulation

Following the election of Joe Biden as US president with an urgent mandate to address climate change, his new administration has announced a “whole of government” approach to reducing emissions. Financial regulators and supervisors have a key role to play in this effort, especially in the management of climate-related risks to financial and economic stability.

This comprehensive report of over 20 specific policy proposals offers a detailed playbook for US financial regulators to integrate climate risk into their oversight responsibilities.

Produced by Americans for Financial Reform and Public Citizen in partnership with the ClimateWorks Foundation, the report begins with the overarching recommendation that President Biden rescind the Trump administration’s executive order deregulating the financial system. Instead, the report suggests replacing it with a new executive order making climate-related risk central to the missions of US financial regulators.

The report goes on to recommend that regulators should require decision-useful climate-related financial disclosures and should expand investor and fiduciary rights to manage climate risk, placing prudential regulation as a core pillar of the response to climate risk. While capacity, sustained action and monitoring from all federal financial regulatory authorities is necessary, the US Treasury should play a leading and coordinating role.

The main body of the report then offers a series of 20 detailed and specific policy recommendations spread across three categories: personnel, staffing and agency organisation; supervision and prudential regulation; and capital markets regulation.

These recommendations include:

• the president should appoint climate champions, establish offices of climate risk, and build the capacity of financial regulators to address this risk;
• climate risk should be incorporated into supervision, disclosure, supervision and prudential tools, and banks should be prohibited from directly holding fossil fuel assets;
• climate-related financial disclosures should be mandatory and material climate information should be incorporated into accounting standards.

These and many other policy proposals are offered in great detail, are specifically directed at the appropriate federal agencies, and refer directly to the relevant regulations involved.

It is important to note that none of the actions recommended requires new statutory authority and US financial regulators already have a congressional mandate to maintain the orderly, stable and efficient functioning of the financial system – a mandate increasingly threatened by climate change.