Congressional testimony: Financial institutions’ role in staving off the climate crisis and protecting our financial system

Climate change threatens the futures of our planet and our people, but its impacts are not limited to physical threats that are gathering momentum, including increasing temperatures, rising sea levels, and intensifying storm systems.

The financial institutions that help regulate our societies are at risk as well, So when some financial regulators take a business-as-usual approach to climate change, they are creating additional risk to a livable world.

I recently had the opportunity to testify in Washington, D.C. on this subject at a hearing held by the House Financial Services Subcommittee on Consumer Protection and Financial Institutions. The hearing was especially timely, with several climate change-related events dominating the U.S in the last few weeks alone: We’ve experienced an unprecedented heat wave that is bringing  brutal temperatures and fires to the West and Pacific Northwest, while the Atlantic just notched the earliest fifth-named hurricane on record.

U.S. financial regulators are in a unique position to positively influence our country’s climate approach and take proactive steps to fortify our systems against this ever-growing threat. But, despite all we know about the climate crisis and its impacts, we are not doing enough.

In my oral testimony, I offered a series of recommendations that the Treasury Department, the Federal Reserve, the SEC, and others must take to protect our banks, insurance companies and financial institutions – and our society – against growing climate risks. Watch or read my full testimony below.

Thank you for the opportunity to appear before you today. My name is Steven Rothstein. I am the Managing Director of the Ceres Accelerator for Sustainable Capital Markets. Ceres is a non-profit organization working with investors and companies to build sustainability leadership within their firms and to drive policy solutions throughout the economy. I represent our membership networks of Fortune 500 companies and 200 investors with over $30 trillion of assets under management. 

My testimony today also draws from Ceres reports that include detailed recommendations. We have also submitted these into the record.

I am not here only to talk about the direct systemic risk climate has on our planet or people, although that is paramount to the lives of our children and grandchildren. 

I am here to highlight both the under-recognized risk to the safety and soundness of our financial institutions due to climate change and the risks the business-as-usual approach of some financial institutions pose to a livable, climate-safe world.

If a banker or a bank regulator suggested they did not need to plan for another pandemic or cyber attack, there would be a chorus of opinions saying that they were not meeting their fiduciary responsibility. Potential exposure to climate risk is bigger and more systemic, yet there are leaders in banking, insurance and even financial regulators that do not fully account for climate risk.

Even as we are working to overcome the unprecedented pandemic, and the pain and loss it brought, we simultaneously had record-breaking fires, hurricanes and unparalleled climate-related transition risks. 

We are, as the Secretary of State said, running out of records to break. 

In short, we know more about the climate risks than we knew about the mortgage finance risks facing our financial system in 2008. But, surprisingly, we are not acting with the urgency required. 

There are dozens of strong international examples from financial regulators we can learn from. We appreciate that the Treasury Department, the Federal Reserve, the SEC and some others have taken initial actions but we need to move faster.

We recommend regulators take five essential steps: 

1. Immediately affirm the systemic nature of the climate crisis and its impacts on financial market stability. 

This affirmation should take the form of a statement from the agency chair or an agency-issued report to underscore the risks posed by climate change to financial markets.

2. Activate action on prudential supervision.

U.S. regulators have explicit responsibilities to supervise the risks that financial institutions take on. Consistent with this mandate, financial regulators should integrate climate change into their prudential supervision of banks, insurance companies and other regulated financial institutions. 

The Federal Reserve, in particular, should take immediate steps to assess the climate risk to financial markets and mandate scenario analyses by the banks and other financial institutions it supervises. The Fed should also outline plans for conducting pilot climate stress tests on its supervised institutions to measure the impact of climate-related shocks, and consider enhancing capital and liquidity requirements to integrate climate risk.

In addition, we recommend the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency and the National Credit Union Administration expand their examiner training programs and manuals to ensure staff fully understand the climate risk faced by the financial institutions they monitor. 

3. Support the Securities and Exchange Commission’s work on mandatory climate disclosure.

We congratulate the SEC for seeking comments and for hopefully issuing bold rules later this year mandating corporate climate disclosure. 

4. Address how climate risks further exacerbate systemic racism, particularly reflected in financial institutions. 

Financial regulators should develop strategies to address systemic climate risks and structural racism in an integrated way. The Community Reinvestment Act (CRA) offers ripe opportunities to enhance economic and climate resilience for low-income and vulnerable communities. 

5. Build capacity for smart decision-making on climate change by coordinating action with other U.S. and global financial regulators and by hiring and training additional staff. 

Coordinated action by U.S. financial regulators at the global, federal and state levels is essential to accelerating efforts to address climate risk. The Financial Stability Oversight Council (FSOC) generally and the Executive Order on Climate-Related Financial Risk plays a critical coordination role.

We appreciate the recent actions of U.S. financial regulators to coordinate with global peers to build on their learnings and experiences to date.

To conclude, U.S. financial regulators have a critical role to play in ensuring the resilience of our economy, weakened from a global pandemic, systemic racism, and threatened by future climate shocks. The safety and soundness of our financial institutions are relying on them and all of you to act. 

Thank you.