Under a new lobbying initiative, sustainability advocate Ceres has published a report calling on U.S. federal financial regulators to treat climate change as a systemic threat to capital markets in their regulations and policies, including in COVID-19 economic recovery stimulus and lending programs.

"These recommendations outline the affirmative steps that regulators should take to protect the financial system and economy from potential climate-related shocks that can flatten an economy and grind it to dust," Sarah Bloom Raskin, a former member of the Federal Reserve Board of Governors and former U.S. Deputy Secretary of the Treasury, wrote in the foreward to the report.

In the June 1 paper, Ceres described 50 steps that should be taken by the U.S. Securities and Exchange Commission, U.S. Federal Reserve, the Commodity Futures Trading Commission, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Financial Stability Oversight Council, Federal Housing Finance Agency, and federal and state insurance regulators.

For instance, the report called on regulators to affirm that climate change poses a systemic threat to capital markets and research how such change will impact the parts of the economy they oversee. It also urged regulators to require insurance companies, banks, commodities traders and other financial institutions to conduct climate-related stress testing.

Regulators such as the SEC should also mandate that companies and financial intermediaries disclose their climate risks, the reported stated. It also said regulators should recognize the economic opportunities associated with climate change and reorient capital toward related solutions.

The report made recommendations specific for the SEC, including to mandate that companies disclose their climate risks in line with the recommendations of the Task Force on Climate-related Financial Disclosures. Ceres also suggested that the SEC should encourage credit rating agencies to disclosure more about how climate risks are factored into their ratings decisions.

Plan of action

The paper will serve as the basis for engaging with those regulators, Ceres' Senior Program Director of Capital Market Systems Veena Ramani said in an interview. The group also hopes to galvanize support among capital market actors such as investors and companies.

Also, Ceres plans to work with federal lawmakers on the issue. Ramani noted that Ceres believes financial regulators already have the legal authority to take the steps outlined in the report but agreed that legislation could help advance those efforts.

Some U.S. lawmakers have been working on those issues, Ramani said. More than a dozen Democratic lawmakers in November 2019 introduced legislation that would direct the Federal Reserve to perform stress tests on large financial institutions to measure their resilience to climate-related financial risks.

Scientists have warned that climate change poses a systemic risk to companies, Sen. Sheldon Whitehouse, D-R.I., said in a June 1 press call on the report. To every sector including agriculture, insurance, banking and investing, "these are dire warnings pointed at the heart of your business that, I think, may be a signal for these industries to step up and show up in congress and actually be a positive force for ... climate legislation. The risks to them for continuing to sit this out are now becoming very concrete."

Ramani said the report's recommendations are meant to be bipartisan and adopted by any administration, but she acknowledged that "if there is a change in administration, some of these recommendations may be taken up sooner."

The new lobbying strategy is part of the Ceres Accelerator for Sustainable Capital Markets, which the group launched in October 2019 to speed up action on climate change based on the recommendations of the United Nations' Intergovernmental Panel on Climate Change. The IPCC found the world needs to quickly slash carbon dioxide emissions and drastically scale up low-carbon infrastructure investments over the next decade to limit global warming to 1.5 degrees C relative to preindustrial levels.

"The transition to a low-carbon future, a net-zero future, is inevitable," Ramani said. "What we want to do by partnering with regulators, and hopefully eventually the policymakers, is create a transition that's predictable, that's smooth and that's not abrupt." Furthermore, given how the coronavirus pandemic has wreaked havoc on the U.S. economy, Ceres will push regulators to build resiliency into the economic recovery program, she said.

Fed COVID-19 lending program should account for climate change

"A lot of decisions are being made by financial regulators right now that have climate consequences," Ramani explained.

For instance, the Fed is moving to get the $600 billion Main Street lending program up and running. The lending program relies on banks to make four-year loans to small and medium-size firms after which the Fed will then buy either 95% or 85% of each loan, depending on what type of loan banks offer. The program is meant to help out companies that were performing well before the pandemic, such as hotels, restaurants or manufacturers, but were forced to shut down due to the crisis. In setting up the rules of the program, the Fed made it easier for oil companies to qualify.

In the report, Ceres recommended that the lending program "should be underpinned by conditions relating to improved climate risk management and guarantees regarding repayment, which would include a financial upside for taxpayers and robust disclosure, including on climate change."

Ramani noted that some agencies are already starting to look into climate change. For example, the CFTC in 2019 created a climate-focused subcommittee within the Market Risk Advisory Committee. And the president of the San Francisco Fed has said the U.S. Fed cannot afford to ignore the economic impacts of climate change.

For his part, U.S. Fed Chairman Jerome Powell in 2019 wrote that while he is aware of the economic threat of climate change, such risks are hard to factor into the Fed's current framework for assessing financial stability, given that some potential risks "do not fit neatly into that framework."

Ceres is hoping that U.S. financial regulators will follow in the steps of the Bank of England, Bank of France and the European Central Bank to either perform their own climate stress tests or require bankers and insurers to conduct the assessments. As for monetary policies, the report urged the Fed to explore whether interest rates may need to be adjusted in response to more frequent extreme weather events, just as some other central banks have done for other disasters.