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 recent 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,” says the March 31 report, “Climate Roadmap for U.S. Financial Regulation.”
A new EO is one of a series of steps the groups seek in their report, which details actions in three areas -- personnel and agency organization, supervision and prudential regulation and capital markets regulation -- they say the administration can take without new statutory authority.
On agency organization, for example, the report calls for creating new offices of climate risk in the Federal Reserve and a host of other agencies; on supervision and prudential regulation, it urges officials to incorporate climate risk into supervision and disclosure decisions, as well as market safety and soundness tools; and on capital market regulation, it calls for the Securities and Exchange Commission (SEC) to mandate climate-related disclosures.
Such actions are needed to ensure firms better account for the physical and transitional costs of climate change in pricing decisions, the groups argue, and say it would result in a more resilient economy with less investment in fossil fuels that drive warming temperatures.
“Appropriate climate financial reforms, once undertaken, will in turn cause firms to price risk more appropriately and to allocate capital more prudently, improving the economy’s climate resilience and shifting capital out of high-carbon activities that pose undue risk in a decarbonizing economy. In the long run, these impacts will also improve the health of markets, the economy, and society,” the report says.
The report says the recommendations were prepared in the lead-up to the Biden administration taking office and were shared during the transition process.
The Public Citizen and AFR report was one of several papers issued ahead of the March 31 meeting of the Financial Stability Oversight Council (FSOC), an interagency group that coordinates actions across regulatory agencies. The council met in part to hear what multiple agencies are doing to begin to account for climate risks.
For example, the Center for American Progress also issued a report the same day that urged FSOC and its member agencies to work together to address the issue. Among other things, it called for FSOC to include climate risk as a factor in its guidance for determining whether a nonbank financial entity, such as an insurance company, can be designated as a systemic financial risk, which would allow scrutiny of firms’ financing or support for fossil fuel investments, among other things.
While top Biden officials are taking early steps to address climate risks in the financial system, they do not go as far as what these and other groups are seeking.
For example, Treasury Secretary Janet Yellen has previously called for regulators to conduct “stress tests” to determine firms’ risks from climate change, but she stopped short of endorsing the groups’ calls for imposing capital and other liquidity requirements on certain companies.
Similarly, on the same day the Public Citizen report was released, Yellen convened the FSOC to hear updates on agencies’ climate work but her action fell short of the report’s call for the council to create a formal climate strategy for the financial system.
Even so, Republicans have been pushing back against the agencies’ early climate efforts, arguing that they lack statutory authority to take any formal actions and that the private sector is better suited for addressing such risks.
“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, told Fed Chairman Jerome Powell in a recent letter.
While the Public Citizen report says agencies already have authority to take the actions they recommend, it also calls for agencies to expand their traditional reach in order to address growing efforts by the financial sector to skirt regulation.
“Regulators must combat regulatory arbitrage and rein in shadow finance,” says the report, referring to the use of private equity, hedge funds and other less-regulated entities and markets that generally fall outside regulators’ purview.
“For climate financial regulation to be effective, policymakers must extend rules to private offerings of securities while simultaneously reversing decades of capital migration to less-regulated, darker corners of the financial universe,” it adds.
The report’s authors say any new Biden EO should reflect their overarching recommendations, which they say fall into five goals.
Firms should not be allowed to hide activities that are exposed to or contribute to climate risks, the report says. This means regulators should require “more accurate, comparable, standardized, and decision-useful climate-related disclosures for use by themselves, investors, and financial institutions.”
Once climate risks are disclosed, investors must be able to act on that information, it adds. “Regulators should protect and expand investor and fiduciary rights to manage climate risk,” the report says, adding that officials must adopt policies on corporate governance and fiduciary duties that allow investors and fiduciaries to act on climate and other sustainability information, so that they may manage climate risk and adopt sustainable investment practices.
Regulators must also use their authority to limit climate-related risks as they do other types of risk and should make substantive prudential regulation “a core pillar” of the response to climate-related financial risks, the groups say. This entails using their authority to mitigate climate threats to individual firms and the broader financial system, while clamping down on financing for fossil fuel projects.
They also call for regulators to expand their current research on climate risks to better calibrate any rules. -- Jeremy Bernstein (email@example.com)