Climate Change Is A Huge Risk To America’s Financial System, Says Major New Biparty Report

Thousands of people fled their homes in northern California last month as hundreds of wildfires quickly spread through the area, burning homes and leading to the death of a helicopter pilot. This week, Oregon is under warning.

The U.S. financial system, including banks, agriculture and oil interests, as well as regulators and investors, needs a unified front to address climate change risks, says first comprehensive government report on those efforts .

Notably, the report released Tuesday by the Commodity Futures Trading Commission and an affiliated panel representing several sectors reiterates a call to tax carbon pollution.

The CFTC’s Climate-Related Market Risk Sub-Committee of the Market Risk Advisory Board published its findings in Climate risk management in the US financial system. The panel behind the statement voted unanimously 34-0 to adopt the 190-plus-page report which recommends that 16 financial regulators and other bodies “incorporate climate-related risks into their mandates and develop a strategy for integrate these risks into their work, including into their existing supervisory and control functions. Disjointed rules and goals have been a major problem in an investment world that increasingly takes climate change into account in decision-making.

The report provides 53 recommendations for action by financial regulators and calls for a national price on carbon pollution. Such a tax would require the approval of Congress. Carbon pricing in the United States has so far been a regional effort, with mixed results.

The panel leadership also took the opportunity to link the immediacy of financial market adaptation to the climate change headlines that dominate current events even as COVID-19 hampers the economy.

“As we have seen in the past few weeks alone, extreme weather events continue to sweep the country from severe wildfires in the West to devastating derecho in the Midwest and destructive hurricanes on the Gulf Coast. This trend – which is increasingly becoming our new normal – will likely continue to worsen in frequency and intensity due to climate change, ”said CFTC Commissioner Rostin Behnam, one of the two Democrats in the group. five members.

“Beyond their physical devastation and the tragic loss of lives and livelihoods, escalating weather phenomena also pose significant challenges to our financial system and our ability to sustain long-term economic growth.” , did he declare. While forest fires and hurricanes happen for a myriad of reasons, their frequency and intensity have been factored into the discussion of climate change.

Read: California wildfires cause power cuts

The bipartite and cross-sectoral panel included 35 representatives ranging from Goldman Sachs Group GS,
-3.92%
to the oil giant BP BP,
-1.53%,
agricultural groups and environmental interests, including The Nature Conservancy and Ceres.

“For a politically and sectorally diverse group of influential members, making such a strong call for regulatory action is a testament to the importance of a climate change financial issue and the urgency with which we need leadership now,” said Mindy Lubber, chairman and CEO of sustainable investment advocate Ceres and panel member.

The main recommendation of the CFTC group is to “set a price on carbon” strong enough to incentivize the private sector to reduce the use of carbon dioxide-producing oil and gas.

Beyond that goal, the report’s dozens of other recommendations include a radical rewrite of financial market rules and practices that could move forward without an act of Congress and regardless of who wins the presidency in November, including demanding of banks that they address climate-related financial risks and publicly. listed companies to disclose their issues.

The report, which presents 53 recommendations to mitigate the risks to financial markets posed by climate change, concludes that:

  • Climate change poses a major risk to the stability of the US financial system and its ability to support the US economy;

  • Climate risks can also exacerbate the vulnerability of the financial system which has little to do with climate change; including vulnerabilities caused by a pandemic that strained balance sheets, strained government budgets and depleted household wealth;

  • US financial regulators must recognize that climate change poses serious emerging risks to the US financial system, and they must act urgently and decisively to measure, understand and manage these risks;

  • Existing laws already provide US financial regulators with broad and flexible powers that could be used to begin addressing financial climate risks now;

  • Regulators can help promote the role of financial markets as providers of climate risk solutions; and

  • Financial innovation is needed not only to effectively manage climate risk, but also to facilitate capital flows to accelerate the net zero transition and increase economic opportunities.

Regulators in the United States have so far lagged behind their European counterparts in managing climate change risks in the financial system. The Trump administration has largely rolled back environmental regulations, alleging their costly burden on business and inconsistent enforcement. The administration has also targeted the inclusion of environmental, social and governance (ESG) investments in pension plans.

“Financial institutions face real risks from climate change and realigning their investment and loan portfolios to net greenhouse gas emissions not only addresses this risk, but also provides additional capital to invest. so as to help reduce emissions that cause climate change. , including investing in nature’s climate solutions, ”said Dave Jones, senior director, environmental risk for The Nature Conservancy, who participated in the panel. “Nature” solutions have historically included reforestation and carbon capture.

This year, the Federal Reserve officially recognized for the first time the potential for destabilization of the financial system by climate change, while considering possible responses.

Read: Climate change poses ‘systemic threat’ to economy, Fed, SEC warns investors with $ 1 trillion at stake

The report urges financial authorities, including the Fed, to integrate climate risk “into their balance sheet management and asset purchases, especially with regard to corporate and municipal debt.”

The findings also call on regulators to conduct further research on the financial implications of climate change and to join international climate-focused groups.


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Don F. Davis