Financial oversight panel unveils climate risk plan

An interagency panel of financial regulators on Thursday approved a series of recommendations meant to help the federal government identify and fend off climate-related risks to the financial system.

The Financial Stability Oversight Council (FSOC) on Thursday issued a long-awaited report on the ways climate change and the societal response to it can pose risks across the financial sector. 

The report does not order member agencies to take any direct regulatory action, nor does it call for mobilizing the financial sector against the fossil fuel industry. Instead, the FSOC report lays out a series of steps regulators should take to help the U.S. match other nations with stronger climate finance regimes.

“Today we’re recognizing how the unique existential risks of the planet will affect every aspect of our lives and the lives of our children, including through effects on the financial sector,” said Treasury Secretary Janet Yellen, who chairs FSOC.

FSOC also includes the leaders of the Federal Reserve Board, Securities and Exchange Commission, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Consumer Financial Protection Bureau, Federal Housing Finance Agency, and National Credit Union Administration, along with an independent member with insurance industry experience.

All FSOC members voted to recommend the report except for FDIC Chair Jelena McWilliams, a Trump appointee who abstained from the voting but expressed a general concern with the financial impact of climate change. McWilliams is one of two Trump appointed FSOC members — including Fed Chair Jerome Powell — but is the sole Republican on the FDIC board.

While some FSOC member agencies have already begun accounting for climate risks, the report marked a breakthrough moment of relative agreement among financial regulators, who had long ignored such issues until President Biden’s election.

The report acknowledges the myriad ways climate change could roil the financial system, including banks’ and investors’ exposure to climate risks, insurance losses on homes and buildings vulnerable to extreme weather and the economic impact of shifts away from fossil fuels.

It also identifies the significant challenges FSOC and its member agencies will face in setting consistent standards for climate data, the complex and novel nature of accounting for climate-related financial risks and high stakes of failure.

The report recommends the creation of a special FSOC climate advisory committee to aid regulators as they develop frameworks for monitoring risks in their slices of the financial system, and bolstering FSOC staff with climate experts. It also suggests a series of steps for each agency to take, including climate risk disclosure requirements and scenario analyses for the firms they supervise.

Environmental groups responded with lukewarm praise, lauding FSOC for taking its first and most serious steps toward climate finance regulations while noting how far behind the U.S. was compared to the United Kingdom and European Union. Both the U.K. and EU have bolstered climate risk disclosures and begun the process of testing banks on their ability to withstand certain climate-related shocks with regulatory penalties for those who follow.

Evergreen Action Campaigns Director Lena Moffitt said the report is “necessary, but it is not sufficient.
“While the report lays out some initial steps for assessing and addressing climate-fueled financial risk, the action items included in the report must be only a baseline. Simply studying and disclosing climate risks is not enough,” she continued.

“Now it is vital that each agency disclose specific plans on how it will deliver. With a very small window to prevent the next climate disaster, each agency must now provide specific timelines when they plan to put in place measures to protect the safety and soundness of our financial system, our institutions, our savings and our communities,” echoed Steven M. Rothstein, managing director of Ceres Accelerator for Sustainable Capital Markets at the sustainability nonprofit Ceres.

Fed officials have ruled out climate stress tests, however, and the idea faces significant pushback from bank lobbyists. Republican lawmakers have also blasted regulators for even considering the risks of climate change on their own, let alone penalizing firms for climate-related reasons.

“If the Biden administration thinks it can change the Earth’s temperature, it should ask Congress—which is accountable to the American people—to change our laws. Continuing down a path of misusing financial regulation to achieve liberal policy objectives sets a very dangerous precedent,” said Sen. Pat Toomey (R-Pa.), ranking Republican on the Senate Banking Committee.