Climate change — already a well-known threat to our weather patterns, infrastructure, electric grids, health and safety — also presents a profound and growing threat to our financial system. Public and private sector economic experts must — and increasingly are starting to — take steps to protect against that threat, including at the highest levels of the federal government.
In two significant actions just last week, the Commodity Futures Trading Commission (CFTC) announced it will establish a new Climate Risk Unit, and the Securities and Exchange Commission (SEC) requested public input about how it should require climate change consideration under its existing responsibility to mandate risk disclosure from publicly traded companies.
Other recent actions by financial regulators abound. This week, the Federal Reserve announced the creation of a Financial Stability Climate Committee to focus on climate risk to the financial system itself. That will complement the Fed’s earlier announced Supervision Climate Committee, which is focused on the resilience of specific firms to the risks of climate change. The Department of the Treasury (USTD) has also signaled that it will add capacity and expertise on climate change, a commitment that Treasury Secretary Janet Yellen made during her confirmation hearing. More generally, a Jan. 27 executive order directs all government agencies to “drive assessment, disclosure, and mitigation of climate pollution and climate-related risk in every sector of our economy.”
Federal regulators are also moving swiftly to review last-minute attempts by the Trump administration to require willful ignorance about the linkages between economic stability and climate progress.The Department of Labor (DOL), which regulates retirement planning, hastily finalized rules in the last days of the Trump administration to undermine fund managers’ ability to consider climate-related financial risks in 401(k) plan selection. And the Office of the Comptroller of the Currency (OCC) finalized a midnight regulation aimed at prohibiting banks from pulling fossil fuel investments deemed risky or unsound. Both actions are now on hold.
Congress is holding hearings too. Experts at Environmental Defense Fund (EDF), where one of us serves as the director of Federal Energy Policy, testified last month before a House Financial Services subcommittee hearing and last week at a Senate Committee on Banking, Housing and Urban Affairs hearing. And in the private sector, investors like BlackRock, credit ratings agencies like Moody’s Investor Service and even the Federal Reserve have been raising the alarm about the financial risks of climate change.
The SEC’s recent actions, like the request for public comments on climate risk disclosure, have particular importance in this context. Under our current laws, publicly traded companies are required to disclose most risks to their business. That requirement protects investors, including millions of ordinary Americans, who need accurate and transparent information to make good financial decisions. However, right now companies are not required to include risks from climate change in their disclosure. SEC Acting Chair Allison Herron Lee has long championed changing that and had earlier directed her staff to enhance their focus on climate-related disclosure in public company filings. Along with the new request for public input, the SEC is laying the groundwork for mandatory climate risk disclosure.
For the financial world, these steps are taking place at breakneck speed. The Federal Reserve’s announcement that it will create a Supervision Climate Committee comes less than six months after it recognized climate risk for the first time in its financial stability reports and then joined the Network of Central Banks and Supervisors for Greening the Financial System. The CFTC’s new Climate Risk Unit follows fast on the heels of a report, which the EDF endorsed, that found climate change “poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.”
It’s encouraging to see these steps in a financially sound direction, but this is only a start. We’ll need to do much more, and do it quickly, to ensure a resilient financial system for the wellbeing of the American people.
Michael Panfil is the director of Federal Energy Policy at the Environmental Defense Fund. Sarah Ladin is an attorney at the Institute for Policy Integrity at NYU Law School.