A new report from the federal Financial Stability Oversight Council (FSOC) has identified climate change as an emerging and increasing threat to U.S. financial stability.
The report includes several recommendations for member financial agencies to mitigate the impact. Among the recommendations, FSOC calls on agencies to assess climate-related financial risks to financial stability, including through scenario analysis, and evaluate the need for new or revised to account for climate-related financial risks. It also calls upon them to enhance climate-related disclosures to give investors and market participants the information they need to make informed decisions. Further, they recommend enhancing actionable climate-related data to allow better risk measurement by regulators and in the private sector and building capacity and expertise to ensure that climate-related financial risks are identified and managed.
“Climate change is an emerging and increasing threat to America’s financial system that requires action,” Secretary of the Treasury Janet Yellen said. “FSOC’s report and recommendations represent an important first step towards making our financial system more resilient to the threat of climate change.”
Among the member agencies, the Securities and Exchange Commission (SEC) has already started to evaluate its disclosure rules, and it has requested public comment on ways to improve climate disclosure. Also, the Federal Reserve Board (FRB) has established two committees to develop a better understanding of climate-related risks and incorporate them into its supervision of financial firms and its framework.
In addition, the Commodities Futures Trading Commission (CFTC) has discussed climate-related financial risk issues through its Market Risk Advisory Committee (MRAC). Further, both the Federal Housing Financing Agency (FHFA) and the Treasury Department’s Federal Insurance Office have requested information on climate-related financial risks from the public to inform their activities
FSOC was established under Dodd-Frank to identify risks to U.S. financial stability, promote market discipline, and respond to emerging threats to U.S. financial stability. FSOC consists of 10 voting members and five nonvoting members, including federal financial regulators, state regulators, and an independent insurance expert appointed by the President.
The Bank Policy Institute welcomed the findings in the FSOC report.
“Climate-related financial risk is a priority issue for the financial sector, and banks are working diligently to better understand, manage and integrate climate-related risk indicators into their overall risk management frameworks,” Lauren Anderson, associate general counsel at BPI, said. “The report notes important work that is ongoing at the banking agencies to assess climate-related financial risks. The development of risk management tools, such as scenario analysis, that integrate traditional financial variables with plausible climate scenarios and emission reduction pathways will be crucial to ensuring risks are measured and managed appropriately.”