Key financial trade groups laid out a vision Feb. 18 for shifting the U.S. to a low-carbon economy, saying that the industry can play a leading role in limiting the risks that climate change poses to the system.

Regulators also appear poised to prod them in that direction. Several policymakers floated the possibility of new regulatory tools and required disclosures around climate-related risks at a climate conference hosted by the Institute of International Finance the same day.

The IIF's Climate Finance Summit takes place amid an atmosphere of increasing urgency around climate in the U.S. The new Biden administration has made tackling climate change a priority. In recent years, big banks and asset managers have slowly trimmed their exposures to fossil fuel companies, though regulators said the industry needs to move faster to meet international climate goals and indicated new regulations could help accelerate that work.

At the conference, Rostin Behnam, the acting chairman of the Commodity Futures Trading Commission, called for the creation of a price on carbon to provide a strong incentive for the market to shift away from carbon emissions. That will make the transition to more sustainable energy sources "smoother and quicker" and limit volatility during the transition, Behnam said.

"If we're not pricing this in, we're not going to move away from carbon emissions as quickly as we need to," said Behnam, who created a private sector subcommittee at the CFTC whose recommendations included carbon pricing.

The IIF and 10 other financial industry groups, including the American Bankers Association and the Bank Policy Institute, threw their support behind a price on carbon in a set of principles it released ahead of the conference. The paper called on U.S. regulators to engage more closely in international regulatory discussions on climate risk, but it also cautioned that any regulations should be narrowly focused on financial climate risk rather than "advance broader economic and social goals."

Listen to an interview with Rostin Behnam in this episode of S&P Global's ESG Insider podcast on SoundCloud, Spotify or Apple podcasts.

Regulators and the private sector have grappled with the lack of standardized data from companies about their climate risks. The industry-led Task Force on Climate-related Financial Disclosures, or TCFD, has created a set of financial disclosures that companies can choose to release to investors, lenders and insurers about the climate risks they are facing. But the work is far from complete, and converging on an international standard for companies will be critical, the Feb. 18 paper said.

Very few companies operate in a single country, and having the public sector play a bigger role would help the ongoing efforts to develop a standard set of metrics across the globe, said Bank of America Corp. CEO Brian Moynihan. The bank worked with the Big 4 accounting firms to develop a uniform set of "stakeholder capitalism metrics" for companies to use in their mainstream disclosures amid broader global efforts to streamline and standardize reporting on environmental, social and governance topics. Several major companies, including Bank of America, recently committed to use those metrics, which include nonfinancial disclosures centered around four pillars: people, planet, prosperity and principles of governance.

At the IIF conference, Moynihan said the new metrics will help show how capitalism can "solve these big problems."

"We can [both] deliver for society and deliver for our shareholders, and that's a wonderful place to be," Moynihan said.

To date, much of the disclosure around ESG metrics is voluntary. That could be poised to change under the Biden administration, which is seen as much more friendly to the sustainability movement than its predecessor. The Trump administration issued various rulemakings that pushed back against ESG principles.

At the IIF conference Thursday, a top Securities and Exchange Commission official said the agency "can and should" help create a system for disclosing companies' climate risks. John Coates, acting director of the SEC's corporation finance division, said those disclosure requirements would need to be "flexible enough to remain relevant" and would therefore require consistent engagement with the private sector on what type of information is useful, reliable and comparable on a global scale.

"I do think something like that is clearly increasingly necessary for the capital markets ... to adequately price climate and other ESG risks and opportunities," Coates said.

Fed weighs 'new or enhanced supervisory tools' for banks

The Federal Reserve may also create new supervisory tools to ensure banks are managing their climate risks adequately, central bank Governor Lael Brainard said in a speech.

"Financial institutions that do not put in place frameworks to measure, monitor and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy, or by a combination of both," Brainard said.

Putting those frameworks in place will ensure banks are "well-positioned to support the transition to a more sustainable economy," she added.

Mandatory and reliable data on companies' climate risks will be critical in that work, but "uncertainty about the future climate trajectory will remain" and require more safeguards at banks, she said. Bank supervisors should encourage lenders to ensure they would be resilient against a range of climate outcomes, and "new or enhanced supervisory tools" could help them do so.

The new tools could include some version of "scenario analysis," which would test banks' balance sheets to ensure individual banks and the entire system can withstand a range of climate scenarios.

The Bank Policy Institute, a trade group that represents several larger U.S. banks, has raised concerns about regulators using such climate stress tests to set capital requirements for banks. While scenario analyses could provide valuable information, they also are a challenging undertaking given the long-run nature of climate risk and the lack of historical data, the group says.

Brainard distinguished between banks' traditional shorter-term stress tests and longer-term climate analyses, though she said it will be critical to "consider how stress testing and scenario analysis may complement one another." The Fed is learning from bank regulators in other countries that are getting underway with climate stress tests, she added.

Asked how the Fed's climate supervision will differ between big and small banks, Brainard said the central bank's goal is always to ensure its work is "tailored" to an institution’s size and complexity. But the Fed also wants to account for the specific risks that banks face in their regions and their exposures to certain sectors, she added.

Brainard highlighted the Fed's new Supervision Climate Committee, which she said will reach out to banks of all sizes to better understand their situations, the challenges they face, and what type of data or tools may be useful in helping them mitigate climate risks.