Insight by Ceres

Think coronavirus is bad? Climate change will be worse, unless government acts

This content is provided by Ceres.

Less than three months after the first confirmed case in China, the novel coronavirus COVID-19 turned the world upside down. Only 73 days after the first reported cases, the U.S. government declared a national emergency. Two days later, the Centers for Disease Control and Prevention made recommendations that spelled an end to public gatherings across the country.

It got that bad that quickly because the world wasn’t ready. And this is just a preview for what’s coming.

A new report from the Ceres Accelerator for Sustainable Capital Markets says that climate change is another significant threat to the U.S. economy, and financial regulators need to act immediately to protect the economy from wide-ranging threats, mounting costs from extreme weather events, including an unplanned transition to a low- or zero-carbon economy, and complicating social and environmental factors.

The Fourth National Climate Assessment estimates climate change could reduce the U.S. economy at a rate of 10% annually by 2100. Extreme weather events have already cost the U.S. $1.775 trillion since 1980, according to National Oceanic and Atmospheric Administration.

Meanwhile, transitioning to a low- or zero-carbon economy could be either enormously beneficial, or disastrous, to the economy. An unplanned transition could devastate companies in high-carbon industries, and indirectly, the banks and lenders that invested in them. A planned transition could deliver massive gains through investment opportunities and job creation in clean energy, on the order of $26 trillion through 2030, according to some experts.

Other projected impacts, such as health risks, decreased productivity, and massive migrations have the potential to compound these economic impacts in ways that are impossible to estimate, but likely to be widespread.

That’s why Ceres, a sustainability nonprofit working with investors and companies is calling on financial regulators to begin preparing now to protect the U.S. economy from these potential impacts.

“The COVID-19 pandemic has revealed just how vulnerable our interdependent and multi-layered financial market is to the impacts of sudden and disruptive events,” said Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets. “Stresses and failures can have cascading impacts across the system and, unlike in the possible resolution to the COVID-19 pandemic, this report makes clear that it is the job of U.S. financial regulators to protect capital markets from the impacts of the climate crisis, and provides a carefully curated set of recommended actions for doing that job and doing it well.”

Ceres’ report recommends more than 50 actions that federal regulators like the Federal Reserve Bank, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation can take now to mitigate these impacts and protect the economy. They fall into four categories:

  1. Affirmation and Research – Regulators need to acknowledge the threat and begin exploring its potential impacts in detail.
  2. Prudential Supervision – Regulators need to ensure banks and other financial lenders are preparing for the impacts of climate change and investing in sustainable ways, including climate stress testing.
  3. Disclosure – Climate risk disclosures must become mandatory.
  4. Coordination – National and global financial regulators must work together and share information to understand the full scope of the threat and how to mitigate it.

The Main Street Lending Program, started by the Fed under the $2 trillion COVID-19 stimulus bill, the Coronavirus Aid, Relief and Economic Security (CARES) Act, provides an excellent starting place for these financial institutions to begin their efforts. As the Federal Reserve pours money into the economy, it should take care to ensure this money is directed away from high-carbon sectors that worsen climate change, like oil companies. Ceres points to efforts in other countries, like Canada, to link stimulus funds with climate risk disclosures.

Other financial regulators can use the COVID-19 response as a template to exercise their broad authorities to require financial institutions to address systemic threats.

“A multi-industry chorus of big investors, central banks, rating agencies, insurers, and top economists warns of severe economic disruption from climate change – what the Bank of International Settlements termed ‘green swan’ risks; systemic and catastrophic,” said Sen. Sheldon Whitehouse (D-RI). “For safety’s sake, U.S. financial regulators must prepare and adapt. This report reviews the work overseas regulators are already doing, and makes recommendations for our U.S. regulators on navigating the dangers ahead.”

The recommendations outlined in Ceres’ report are especially important now, considering the current vulnerability of the U.S. economy. Unemployment is rampant, the stock market is unstable at best, and supply chains are a mess. If the “carbon bubble” were to burst, it would be devastating to the economy.

That’s why it’s so important that financial regulators build measures to mitigate the threat of climate risks into the country’s recovery from the pandemic. These agencies already have the tools they need to begin their efforts to prevent the worst-case scenario from coming true.