Officials from several U.S. federal financial agencies on March 23 described their coordinated new government-wide approach to addressing the systemic risks that climate change poses to financial markets.
Since President Joe Biden — who has talked about the risk of climate change to the economy — took office in January, regulators at the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve have taken multiple measures. They have created climate-focused senior staff positions, launched new climate-related committees, and/or announced other initiatives aimed at ensuring that publicly traded companies and financial systems recognize climate risks and opportunities, disclose related information, and move to adapt.
Most recently, at a March 23 virtual conference hosted by the sustainability-focused investor network Ceres, Federal Reserve Board Governor Lael Brainard announced the board has established a Financial Stability Climate Committee, or FSCC, to identify, assess, and address climate-related risks to financial stability.
"The broad goals of the FSCC are to promote the resilience of the financial system to climate-related financial risks, to ensure coordination with the Financial Stability Oversight Council and its member agencies, and to increase the Federal Reserve's international engagement and influence on this issue," Brainard said at the event.
The many new agency climate-related initiatives, such as the Commodity Futures Trading Commission's recent announcement of a new Climate Risk Unit, is a "collective effort," CFTC Acting Chairman Rostin Behnam said at the Ceres conference.
"We're all here today ... as leaders engaged in bringing climate change more conclusively into the regulatory fold to ensure that the structures and the tools and the strategies, the products, the individuals and the staff and the policies are in place to address physical and transition risks that we, as a global community, are facing," Behnam said. The goal is to "start building better equipped financial systems now, that both acknowledge and account for the inevitable impacts of climate change."
"I'm a firm believer that we can be positioned to avoid the need for extreme shifts in balance sheet management and fiscal and monetary policy in the future," he added.
Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen shared their thoughts on the issue at a House Financial Services Committee hearing the same day as the Ceres event.
The Fed is in the "very early stages" of understanding the vulnerabilities that climate change poses to banks and whether scenario analyses would be helpful, Powell told lawmakers. The public has "every right to expect" that the Fed will ensure that banks are managing climate risks adequately, he added.
Republicans have worried that those efforts could lead to regulators explicitly telling banks they should not lend to the fossil fuel industry, and they have sought to prevent big banks from curtailing their financing for the industry.
"Injecting ill-defined climate scenarios into financial regulation and supervision creates the immediate and very real risk of driving investment and credit allocation away from job-producing industries," Rep. Andy Barr, R-Ky., said at the hearing.
Asked about those concerns, Powell told Rep. Frank Lucas, R-Okla., that the Fed does not "tell banks what legal businesses they can lend to." Yellen also said the Treasury has no plans to "regulate what lending or investments can be done."
Still, she said managing climate risks is a "top priority" for the Biden administration, supporting efforts to test banks against climate scenarios and to require that companies disclose climate-related risks to investors.
She also said the Financial Stability Oversight Council could play a role in arranging interagency discussions and "coordinate a system-wide response," which would include identifying and sharing the best data on the issue. The FSOC, which Yellen chairs, includes leaders from the Fed, the Securities and Exchange Commission, CFTC, Federal Deposit Insurance Corp. and other regulatory agencies.