9 september 2020

Climate Change ‘Poses a Major Risk’ to U.S. Financial System, Warns Regulator

By Leslie P. Norton, Barrons, Sept. 9, 2020 12:03 pm ET

Climate change “poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy,” according to the Commodity Futures Trading Commission in a new report.

The report, titled “Managing Climate Risk in the U.S. Financial System,” is believed to be the first-ever detailed assessment by a U.S. financial regulator of how climate change can affect the U.S. financial system. The CFTC regulates the U.S. derivatives markets.

The report was written by a subcommittee of the CFTC that included banks, asset managers, asset owners, and companies in agriculture, oil and gas, and financial services, as well as environmental researchers. The committee was chaired by Robert Litterman, the former head of risk management at Goldman Sachs and a founder of Kepos Capital, an investment firm.

Among other things, the report recommends that Congress establish a price for carbon to discourage polluters. “Financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions,” according to the report. “In the absence of such a price, financial markets will operate suboptimally, and capital will continue to flow in the wrong direction, rather than toward accelerating the transition to a net-zero emissions economy.”

The risks from climate change include damage to infrastructure, housing, crops, communities, and livelihoods, as well as to the value of financial assets, according to the report, which argues that systemic shocks related to climate change can undermine the financial health of banks and insurance markets.

It makes 53 recommendations, including that financial supervisors require bank and nonbank financial firms to address climate-related financial risks, that companies make meaningful disclosures about climate risk, and that U.S. and financial regulators provide clarity to confirm the appropriateness of making investment decisions using climate-related factors in retirement plans.

The U.S. Labor Department, meanwhile, recently proposed a rule that limits environmental, social, and governance investments in retirement plans.

Asset owners such as the state of California have been urging regulators to protect the financial system against climate-related shocks. In October, Mary Daly, president of the Federal Reserve Bank of San Francisco, said extreme weather events such as hurricanes or wildfires also disrupt payment systems which makes an understanding of climate risk critical to a healthy, stable economy.

In a statement, Nathaniel Keohane of the Environmental Defense Fund, one of the subcommittee members, said, “This threat matters for the millions of consumers, businesses, and farmers across the U.S. economy who depend on a stable financial system.”

Mindy Lubber, CEO of advocacy group Ceres and one of the subcommittee members, said in a statement, “For a politically and sectorally diverse group of influential members to issue such a strong call for regulatory action is testament to just how important a financial issue climate change is, and to just how urgently we need leadership now.”

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