Financial regulators home in on climate risks

Financial regulators are putting their environmental agenda into action as the Biden administration expands the ways the federal government will fight climate change.

After years of pressure from environmentalists and advocates for tighter financial rules, leaders at the Federal Reserve, Securities and Exchange Commission (SEC) and Treasury Department are laying out how the companies they regulate will be expected to respond to the climate-related risks facing the financial sector.

“I think we’ve come a long way in a very short period of time, and that was necessary because we were starting from behind,” said Gregg Gelzinis, senior policy analyst at the liberal Center for American Progress.

The SEC on Wednesday began the process of rewriting — and likely tightening — its guidelines for how publicly traded companies must disclose the way climate change affects their finances and outlook. The commission is also expected to boost its climate enforcement efforts after years of indifference from both Democratic and Republican chairmen.

At the Fed, officials are mulling how to gauge the climate-related threats facing major banks and recently created a committee to study the issue. And Treasury Secretary Janet Yellen is expected to bring on a climate czar to coordinate the department’s fight against what she calls an existential threat.

“Eighteen months ago we weren’t talking about this issue. Yet today, I think everyone would acknowledge that it’s going to be a top priority for financial regulators for the foreseeable future,” Gelzinis said.

The politically divisive nature of climate change in the U.S. has prevented federal regulators from addressing what’s become a widespread concern across the financial world. Bank watchdogs and the industry on whole have been reckoning for a decade with the various ways climate change could upend the financial system and cause some firms to suffer steep financial losses.

Rising sea levels and intensifying wildfires make banks with heavy mortgage portfolios vulnerable to severe losses in certain parts of the country. The financial sector also faces financial risks stemming from the transition to renewable energy, as a combination of state and federal laws, international accords and scientific advancements quickly spur a move away from fossil fuels.

With a push from the Biden administration, regulators are just now crafting their own agenda and drawing from lessons learned by foreign counterparts.

“We’re really in the early stages of understanding this right now. We’re doing a lot of outreach,” Powell told the House Financial Services Committee on Wednesday.

“We don’t have a framework for thinking about this. There are tremendous data gaps — it’s just early days.”

The Fed has walked a careful line as it steps into the climate field due largely to the intense political nature of the issue in the U.S. and the bank’s historic aversion to partisan debates. While other central banks, such as the Bank of England, are crafting climate stress tests, Powell suggested that the Fed is more likely to develop scenarios meant to help banks understand the specific risks they face.

Bank advocates say they are generally pleased with the Fed’s early steps on gauging climate risk.

“All of that is eminently sensible and, to some degree, the banks are probably a few steps ahead in terms of their level of sophistication and granularity in how they’re looking at some of these risks because they’ve been dealing with this for a while,” said Lauren Anderson, senior vice president at the Bank Policy Institute and former adviser to ex-Bank of England Governor Mark Carney.

While the Fed’s actions have drawn praise from some, Republicans and executives in the oil and gas industry have grown increasingly alarmed about the impact those efforts will have on fossil fuel companies.

“Even without a directive from the Fed, climate scenarios and stress tests may compel firms to debank certain industries to satisfy the spirit of the tests,” Rep. Andy Barr (R-Ky.) told Powell during the Wednesday hearing.

“Choking off capital to fossil energy will not only produce the kind of reliability challenges we saw last week in Texas, it will undermine the Fed’s maximum employment mandate.”

Powell insisted that the Fed would be focused on its financial stability mandate, and nothing beyond that.

“We are not climate policy makers here who can decide the way climate change will be addressed by the United States. We’re a regulatory agency that regulates a part of the economy,” Powell told lawmakers on Wednesday.

Even so, more aggressive action could come from other regulators where President Biden can make more of an imprint.

The SEC could accelerate its climate agenda once Biden’s pick for chairman, Gary Gensler, is confirmed by the Senate and establishes a 3-2 Democratic majority.

Yellen has also promised that the Treasury Department’s approach to climate policy will “change dramatically” under her watch. As the chair of the Financial Stability Oversight Council, Yellen can push the interagency panel of regulatory chiefs toward holding major companies with higher climate risk, such as insurers and mortgage lenders, to tougher rules.

Any move to bolster climate-related financial rules is certain to draw political backlash from Republicans. GOP lawmakers have been furious with banks pulling back on financing for certain oil and gas drilling projects as the fossil fuel industry faces growing threats, and have supported efforts to force banks to serve those companies.

Rep. Blaine Luetkemeyer (R-Mo.) told Powell he feared that efforts to regulate climate risks could turn into a reboot of Operation Choke Point, an Obama administration initiative that investigated banks that served firearm dealers and other businesses deemed likely to be vulnerable to fraud and money laundering.

“To use climate change as an excuse to go after businesses who are doing legal business in a legal way producing products and services we need as an economy is wrong,” he said to Powell, who assured him the Fed would not be involved in such an effort.

While crafting climate change policies are laden with political risks for regulators, supporters of tougher rules say they cannot afford to be too timid in the face of a global threat.

“I don’t think we have time to study this issue for five, six, seven years and then decide whether or not we want to proceed to integrating this into supervision and regulation,” Gelzinis said.

“I think the risks are too acute and they’re only mounting. We don’t have the time to wait.”