Climate advocates turn sights on Wall Street

The fight over climate change is increasingly focusing on Wall Street, with a key federal watchdog this week directing regulators like the U.S. Securities and Exchange Commission (SEC) to do what they can to lower emissions.

Civil society advocates told The Hill that in addition to sending a signal to Wall Street, the move by a top interagency oversight group to label climate change an existential threat to the financial system aids Democrats’ efforts to use financial regulation as a tool in the climate fight.

The report, issued by the Financial Stability Oversight Council (FSOC), steered clear of specific prescriptions to financial regulators, such as calling for mandatory stress tests, capital requirements or caps on fossil fuel investments, as The Hill reported Thursday.

But by finding that a “disorderly transition” to a low carbon economy was a key threat to the economy, it has opened the potential floodgates for financial regulators to act against emissions in order to stabilize the market, said Alex Martin of Americans for Financial Reform.

“Once you make that call, it’s obvious [that regulators] need to intervene, and the end result of that process will be lower emissions,” Martin said.

“And that will happen because emissions threaten the financial system,” he added.

Advocates said they were disappointed with the report’s lack of specific guidelines but agreed that beyond all the qualified clauses lies a clear warning to America’s financial system.

“The phrasing of the recommendations is extremely weak, with most couched in several layers of caveats,” said Yevgeny Shrago, a policy counsel with Public Citizen.

However, Shrago said, “If you [take] what they say seriously about climate being a risk, then there’s no question that regulators need to take a bunch of these actions.” He added that failing to do so “would be a dereliction of their duty.”

The FSOC report is also one of the first major reports from a financial regulator to acknowledge that “communities of color are facing risk from climate first and worse, and they hold the bill most acutely if we go into a climate recession,” Becca Ellison of Evergreen Action said.

The report included one unambiguous policy prescription: that regulators work to create a rigorous framework for banks and publicly traded companies to disclose their risks from both climate change and the energy transition.

Martin and the other advocates said that while more needs to be done, the labeling of climate change as an existential threat is a key step to forcing regulators to confront the magnitude of the economy’s exposure to climate risk.

Once they “look under the hood” at banks and public companies, the SEC and others will likely “see a lot of climate-related risk that is unexpected and has been easy to ignore,” Martin said.

This puts financial regulators in a key position to confront fossil fuel emissions that congressional Democrats have so far been unable to counter. 

Earlier this week, progressive Democrats were angered by reports that the Clean Energy Payment Program (CEPP) — which would pay or fine power utilities based on their ability to meet rising clean energy standards — has been struck from President Biden’s Build Back Better legislation.

The CEPP was just one of many congressional proposals to cut emissions, Sen. Ron Wyden (D-Ore.) told reporters on Monday, with “the overwhelming majority of emissions reductions com[ing] from the energy tax overhaul” in the bill, and movement toward a carbon tax.

Other legislation would mandate some of the actions left out of the FSOC recommendations. A bill by Sen. Brian Schatz (D-Hawaii) and Rep. Sean Casten (D-Ill.) would direct the Federal Reserve to organize climate stress tests to see how vulnerable banks are to climate change. 

And in the House, there is the Fossil Free Finance Act from Reps. Ayanna Pressley (D-Mass.), Rashida Tlaib (D-Mich.) and Mondaire Jones (D-N.Y.), which would direct the Federal Reserve to call for all banks holding more than $50 billion to “align their financing of greenhouse gas emissions with science-based emissions targets.”

But regulators don’t need to wait for Congress, advocates say, arguing regulators have all the power they need right now. And by connecting climate change to financial risk — precisely the type that the Dodd-Frank Act set up the FSOC to head off — advocates say the report released this week has given its members the cover to act.

The risk of emissions to the financial system “is going to increase if we don’t get power sector emissions under control, which adds to the urgency of using financial regulation to protect the system,” Martin said.

The potential loss of the CEPP program makes such action particularly urgent, Martin said. “Without that program, there will be far more emissions from the power sector, worse climate change, greater economic impacts from physical damage — and also a more costly, disorderly transition.”