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Climate change poses a fundamental risk to our economic system. A growing bipartisan movement is underway to make sure US financial regulators understand that, and act quickly. In June, a report from the Ceres Accelerator for Sustainable Capital Markets laid out the mounting economic toll of the physical impacts of climate change, and the economic impact of an unplanned-for transition to a low- or zero-carbon economy, as well as compounding social and environmental impacts of these major events. The report found that climate change poses a systemic risk to financial markets, and recommended more than 50 key steps U.S. financial regulators can take right now to incorporate climate change across their mandates.
The report was swiftly endorsed by some of the world’s largest investors, as well as former financial regulators, and former members of Congress from both sides of the aisle, and the heads of major companies, NGOs, and philanthropic foundations. This group of market leaders issued a letter to the heads of major financial regulatory agencies like the Federal Reserve (Fed) and the Securities and Exchange Commission (SEC), making headlines in major publications like the New York Times, the Washington Post, Forbes, and manythers.
“It is more clear than ever that the climate crisis poses a systemic threat to financial markets and the real economy, with significant disruptive consequences on asset valuations and our nation’s economic stability,” the letter read. “You lead a critically important agency that has a mandate to protect U.S. market stability and global competitiveness. This carries with it a responsibility to act on the climate crisis right now, and to guide our transition to a net-zero future.”
Around that same time, California Insurance Commissioner Ricardo Lara took up one of the report’s recommendations, launching the first-ever database of green insurance products designed to address climate risks. Lara cited the Ceres report as a main driver of this initiative.
“Understanding, preventing, and reducing climate risk is of paramount importance, and we need innovative insurance solutions to accelerate the transition to sustainable and resilient communities and economies,” Lara said. “When disaster strikes, insurance can help damaged homes, buildings, and vehicles be built back better, stronger, and greener and springboard into the cleanest technologies.”
Soon after, Sen. Elizabeth Warren (D-Mass.) also sent a letter to the chairman of the SEC, calling for the agency to require public companies to disclose climate-related risks, including greenhouse gas emissions, fossil fuel assets, and the potential impact of worsening climate change on the business.
“It is distressing that by ignoring these climate risks, the SEC is not fulfilling its mission to ‘protect investors’ and ‘maintain fair, orderly, and efficient markets,’” Warren’s letter said. “I urge you to take immediate measures, including those found in my Climate Risk Disclosure Act, to implement standard climate risk disclosures so that investors and the public can accurately assess and address climate-related environmental and financial threats.”
The Senate Democrats’ Special Committee on the Climate Crisis then lent their significant weight to this effort, with a major report on climate risk that echoes Ceres’ call for action from financial regulators with an entire chapter devoted to actions U.S. financial regulatory agencies can take to avert economic crisis at the hands of climate change.
“The climate crisis is not some distant threat. It is here now, and it will be catastrophic if we don’t strike back immediately,” said Senate Minority Leader Chuck Schumer (D-N.Y.). “Over the next few decades, climate change will affect every part of American life: our health, our economy, our national security, even our geography. Democrats are committed to working—decisively and aggressively—to avoid the steep human and economic costs of a worsening climate crisis, and to guide the transition to a low carbon economy.”
Then came the inflection point. In September, for the first time ever, a subcommittee of a major U.S. financial regulatory agency issued its own report — affirming that climate change poses a systemic risk to the American economy, and issuing a substantial set of recommendations for regulatory action. The Commodity Futures Trading Commission’s Market Risk Advisory Committee issued the report with input from a broad array of market leaders — including NGOs, banks, investors, and regulators.
“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,” said Mindy Lubber, Ceres CEO and member of the CFTC subcommittee. “We are committed to driving and accelerating transformative change within U.S. financial regulatory agencies through the Ceres Accelerator for Sustainable Capital Markets, and I look forward to working with the CFTC and other agencies to make sure they quickly implement these bold recommendations and protect our capital markets from the systemic threats of climate change.”
That report issued a shot heard round the regulatory community, and now more and more actions are being taken. Over the past few weeks, the New York Department of Financial Services issued a call for all of the insurers it regulates to incorporate climate risk into its forecasting. SEC Commissioner Allison Herren Lee penned an op-ed for the New York Times, making the case for mandatory climate risk disclosure. The Richmond Fed, the New York Fed, and the Washington State Insurance commissioner all held summits on climate change’s risk on the economy.
As we head into November, you can expect the calls for regulatory action to tackle climate change as a systemic risk to get even louder. You can expect more and more regulators to get on board. And you can expect investors, companies to prepare for what’s to come.