U.S. financial regulators have a critical role to play in bolstering our economy, weakened from a global pandemic and threatened by future climate shocks. This report lays out the steps that U.S. financial regulators should take now to address climate change consistent with their mandates and seize the vast opportunity of a sweeping economic transformation that can stabilize our climate while reducing long-standing social and economic inequalities.
In June 2020, Ceres released Addressing Climate as a Systemic Risk: A Call to Action for U.S. Financial Regulators. It laid out how climate change threatens the stability of financial markets and the overall economy, and how and why U.S. financial regulators must address this systemic risk as part of their existing responsibilities.
Much has changed since the report’s release 10 months ago.
We have seen early progress from financial regulators to acknowledge the systemic financial risks of climate change. Of particular note, in November 2020 the Federal Reserve identified climate as a near- term “financial stability risk.” The U.S. Commodity Futures Trading Commission (CFTC) climate risk subcommittee issued a comprehensive report with an unequivocal warning: “Climate change poses a major risk to the stability of the U.S. financial system and its ability to sustain the US economy.” Regulators are starting to indicate their intention to integrate climate change into their mandate and are starting to build up their own internal capacity.
Despite these advances, most U.S. federal and state financial regulators have yet to act on the climate crisis and lag far behind their global counterparts and what the science demands.
The past year was also marked by a national reckoning on systemic racism and its longstanding linkages to the American economy. Astonishing wealth gaps, damages from climate disasters and broader social and economic inequities were laid bare. Financial regulators can no longer afford to look at systemic racism, climate change or the pandemic in isolation. Each feeds into the other, with significant populations, especially communities of color, bearing the most severe burdens.
The coming months are a unique opportunity for U.S. financial regulators to leapfrog into global leadership on the climate crisis. 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. With the clock ticking on the climate crisis, quick and decisive action is crucial.
This report lays out the steps that U.S. financial regulators should take now to address climate change consistent with their mandates:
1. Affirm: Immediately affirm the systemic nature of the climate crisis and outline action steps to address the crisis, including developing details for how climate change will be integrated into prudential supervision including stress tests.
2. Activate: Integrate climate change into prudential supervision of key industries including banks and insurance companies.Mandate climate change disclosure and reinstate and reinforce the freedom of investors to address climate change risks.
3. Integrate: Integrate racial equity into discussions on climate change and financial stability. Incorporate considerations of climate change in pandemic recovery responses .
4. Build capacity: Strengthen financial regulator coordination domestically and globally. Build out climate competence of staff and enhance internal capacity through research and advisory groups.