It’s Our Financial Regulators’ Job To Protect Us From Climate Change. It’s Our Legislators’ Job To Make Them!

Climate Change and SustainabilityDemocracy Law and Human Rights

Oct 13

Written By Steven M. Rothstein and Veena Ramani

We are under siege. As climate-induced wildfires ravage the American West and hurricane after hurricane hit our Southern border, our lives, our livelihoods, and the stability and security of our markets are in danger. While the physical risks are worsening, the economic transition risks that accompany them are already manifesting.

Climate change is here, and its impacts are so vast and profound that it has the potential to destabilize our entire financial system. Thankfully, a bipartisan, multi-sectoral movement is under way to make sure our financial regulators protect us. More and more legislators should step up and join it.

This summer, investors with roughly $1 trillion in assets under management, including some of the largest public pension funds in the country, joined forces with former regulators, businesses, and former members of Congress from both major political parties to urge the Federal Reserve (Fed) and other financial regulators to protect the economy from the systemic threat of climate change.

Not long after, the U.S. House of Representatives' Committee on the Climate Crisis issued a report calling on financial regulators to act on climate risk. Just a few weeks later, the Senate Democrats' Committee on the Climate Crisis issued a major climate report, with significant emphasis on the role financial regulators must play in avoiding severe climate risks to the U.S. economy.

And just last month, a subcommittee of the Commodity Futures Trading Commission (CFTC) issued the first ever climate risk report from the auspices of a U.S. financial regulator -- making clear that U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system. This groundbreaking report, issued with a 34-0 vote in favor from a diverse membership reflecting business, non-profit and academic interests, garnered widespread attention and acclaim, and proved that some financial regulators are beginning to get the message.

While the positive steps forward are great to see, it’s not yet enough. We are still well behind our peers around the world - and are therefore more vulnerable to the systemic risks of climate change and worse prepared for the future than other countries. Central banks in England, France, and the Netherlands have moved from rhetoric to action and are rolling out climate stress tests. New Zealand just announced it will mandate TCFD disclosures from major companies, and Canada is tying such disclosures to corporate aid provided as a part of its economic stimulus programme.

A June report from the Ceres Accelerator for Sustainable Capital Markets, lays out a clear roadmap for action from financial regulators. This includes affirming the systemic nature of climate change risks, integrating climate change into their prudential supervision efforts, requiring climate disclosures, among others. Our lawmakers must exercise their unique power to make sure they take these actions now, before it’s too late.

1. Push the issue to the forefront

Legislators can effectively push this issue to the forefront by using their platforms to urge agencies to take up climate change as a financial risk, as some have already done. In early June, senators Marco Rubio (R-FL) and Dianne Feinstein (D-CA) called on the Commodity Futures Trading Commission to include specific recommendations for addressing the financial risk of climate change in the newly released report by its Climate-Related Market Risk Subcommittee. In August, Senator Elizabeth Warren (D-MA) urged SEC Chair Jay Clayton to mandate climate risk disclosure.

2. Exercise your oversight authority

Legislators can integrate climate change competence into their oversight responsibilities as members of crucial financial regulatory committees. This includes probing the extent of the agency’s existing efforts on climate change and urging immediate action. Climate change also becomes relevant as Congress considers who leads which agencies. When weighing whether a potential agency leader is appropriate, members of Congress must ask themselves: What is the perspective of this candidate on the systemic impacts of climate change.

3. Legislate

Legislators can, well, legislate. While financial agencies can and should act on climate change as a part of their existing authority, new laws to explicitly require these agencies protect the economy from climate change would help remove any perceived ambiguity. Senator Brian Schatz has introduced the Climate Change Financial Risk Act, directing the Fed to conduct stress tests on large financial institutions to measure their resilience to climate-related financial risks. Draft legislation in Connecticut calls on the insurance commissioner to assess the feasibility of TCFD-based climate risk disclosures.

The impacts of the pandemic underscore how dangerous it is to delay action to address a known and systemic risk. Climate change is a known and systemic risk. Its impacts already extend across political parties, across communities and across constituencies. We need our elected representatives to hold regulators to account for immediate climate change action. It will only get worse the longer they wait.