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Finance Officials Urged To Bolster Early Steps To Assess Climate Risks

April 7, 2021

Biden administration financial regulators are taking initial steps to account for climate change risks in the financial system, but they are facing growing pressure from environmentalists and other groups to do more, including limiting financing to fossil fuels, in an effort to spur a significant private sector shift toward low-carbon energy.

Climate policies by the regulatory agencies have gained momentum during the Biden administration, including an expected push by the Securities & Exchange Commission (SEC) to require companies to disclose their physical and “transition” climate risks, a step that could impose pressure on firms to decarbonize.

And while the Federal Reserve and other agencies have issued high-level warnings about climate’s risk to the broader financial system, advocates are pushing them to accelerate their efforts even as Republican officials are stepping up their scrutiny:

Sustainability Group Urges Financial Regulators To Speed Climate Work

Even as the Biden administration steps up efforts to account for climate change risks in the financial system, sustainability advocates are urging financial regulators to speed their efforts, arguing early work at several key agencies is too modest to tackle increasingly pressing climate threats.

“The coming months are a unique opportunity for U.S. financial regulators to leapfrog into global leadership on the climate crisis,” says an April 6 report from the sustainable investment group Ceres. “With an engaged president and senior administration officials, financial regulators can help catalyze a low-carbon transition that will bolster the country’s competitiveness while driving a more equitable economy.”

The report flags several areas where the group hopes to see more aggressive action, particularly at the Federal Reserve. Specifically, it says the central bank should “take immediate steps to assess the overall health of financial markets from climate risks and should mandate climate scenario analyses by banks and other financial institutions.”

The Fed also should “outline plans for conducting climate stress tests, which measure how climate-related shocks, whether from a sudden drop in economic growth or the decline of a specific industry, would affect individual institutions and the broader financial system,” the Ceres report says. “Many other central banks globally are already taking such steps.”

The report is the latest pressuring top Biden officials to step up their efforts to account for climate risks in the financial sector. Last week, a coalition of consumer, labor and other groups urged President Joe Biden to issue a new executive order stating that “climate-related risk is central to financial regulators’ missions.”

Groups Seek New Biden EO To Put Climate At Center Of Finance Rules

Consumer, labor and other groups are stepping up their calls for the Biden administration to significantly strengthen oversight of the finance sector’s efforts to account for climate risks, urging President Joe Biden to start by issuing a new executive order (EO) that make the issue a central feature of regulators’ work to protect the financial system.

“President Biden should rescind and replace Executive Order 13,772, by which the Trump administration established a set of deregulatory and corrosive Core Principles for Regulating the United States Financial System,” argues a March 31 report from Public Citizen and Americans for Financial Reform (AFR), a broad coalition of consumer, labor, housing, civil rights and other groups.

“Biden’s new order should clearly state that climate-related risk is central to financial regulators’ missions, and it should set forth how financial regulatory agencies should work together to protect our economy and the public from the grave economic impacts of climate change,” it adds.

The advocacy comes on the heels of Treasury Secretary Janet Yellen convening a March 31 meeting of the Financial Stability Oversight Council (FSOC), an interagency group that coordinates actions to maintain the stability of the system. There, officials gave updates on an array of efforts by various agencies to address climate risks:

Financial Regulators Plow Ahead On Climate Focus, Rejecting GOP Concern

Led by Treasury Secretary Janet Yellen, a host of federal financial regulators made clear they are continuing an array of efforts to assess the physical and transition risks posed by climate change, brushing aside concerns from Republicans that such efforts fall outside their authority.

The council’s members, according to a Treasury readout of the meeting, highlighted “the channels through which climate change could pose risks to the financial system and work the Federal Reserve is undertaking to monitor and better understand climate-related risks to financial stability.”

Climate change “is an existential threat to our environment, and it poses a tremendous risk to our country’s financial stability,” Yellen told her fellow regulators.

She added: “Our financial system must be prepared for the market and credit risks of these climate-related events. But it must also be prepared for the best-possible case scenario: that we begin a rapid transition to a net-zero carbon economy, which also creates potential challenges for financial institutions and markets.”

Yellen later added -- during April 6 remarks to the Coalition of Finance Ministers for Climate Action, a group the United States joined last week -- that officials are “working to understand and mitigate the risks that climate change poses to the stability of the financial system and macroeconomy in the United States and across jurisdictions.”

She listed several steps officials are taking, including “working to increase the availability of consistent, comparable, and reliable information on climate-related financial risks; to coordinate approaches among regulatory agencies to address climate risks; and to examine potential systemic consequences of climate change.”

Amid the increased federal action, California policymakers are crafting an advisory group on climate risk disclosure, an effort intended to boost the Biden administration’s policies:

California Forms Climate Risk Disclosure Group, To Bolster Biden Efforts

California Gov. Gavin Newsom (D) has created a climate risk-disclosure advisory group to help identify best practices for any new disclosure policies while also informing government decisions on the potential climate impacts of public investments, efforts that officials say are aimed at bolstering Biden administration efforts to craft disclosure rules.

The Climate-Related Risk Disclosure Advisory Group “will focus not only on identifying best practices across national and international climate risk disclosure, but also on the unique challenges and opportunities that might arise when applying climate risk disclosure to a public sector decision-making context,” Newsom’s Office of Planning & Research says in an April 5 statement.

“There is no question that climate change is having an immediate impact on California’s fiscal and economic health,” the governor adds. “This effort will improve our understanding of climate risk from an investment perspective, ensuring California leads not only on climate policy, but on safeguarding public dollars in the face of increasing climate risk and advancing an equitable recovery.”

The support from California and advocates’ push for more aggressive policies could serve as a counterbalance to increasing GOP opposition climate-related measures by financial agencies:

Republicans Step Up Warnings Over Financial Regulators’ Climate Efforts

State and congressional Republicans are stepping up their scrutiny of federal financial regulators’ efforts to require public corporations to disclose their climate risks, warning that officials should not use enforcement actions as a “backdoor” for new regulations and that any future disclosure rules would violate the First Amendment.

“We question both the purpose and efficacy of climate-related banking regulation and scenario analysis, especially because the Federal Reserve lacks jurisdiction over and expertise in environmental matters,” Sen. Pat Toomey (R-PA), the top Republican on the Senate banking committee, and other GOP committee members said in a recent letter to Fed Chairman Jerome Powell.

Toomey also wrote to acting SEC Chairwoman Allison Herren Lee, arguing the commission should not use its enforcement actions as a “backdoor” effort to require additional climate disclosures.

“It is imperative that the SEC provide fair notice, and fully comply with the Administrative Procedure Act if it is going to impose new requirements. The SEC also should not use enforcement actions as a backdoor for imposing new regulations on [environmental, social and governance (ESG)] and climate change issues,” Toomey wrote to Lee in a March 24 letter.

Additionally, West Virginia Attorney General Patrick Morrisey (R) recently warned the SEC’s Lee that her plan to mandate climate risk disclosures violates First Amendment protections against compelled speech. “There is a significant constitutional obstacle to the unprecedented and dangerous course you charted,” he wrote. “If the commission proceeds down this pathway, States and other interested stakeholders will not hesitate to go to court to oppose a federal regulation compelling speech in violation of the First Amendment.”

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