• Sat. Oct 31st, 2020

‘Slam the Brakes’: Regulator Flags Climate Risk in Markets

“Frequent and devastating” economic shocks brought on by climate change threaten to undermine the stability of the U.S. financial system, according to a first-of-its-kind report from a financial regulator.

The watershed document was released yesterday by a climate-focused subcommittee within the Commodity Futures Trading Commission, a federal agency that regulates derivatives markets.

The CFTC task force was created last year to investigate global warming’s potential to topple financial markets—and to determine what steps the federal government should take to prevent that outcome.

The subcommittee’s work resulted in a sweeping, 165-page publication that was unequivocal in its assessment of the threat.

“U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks,” wrote the authors.

They added that global warming has begun to affect “nearly every facet of the U.S. economy.” It’s a reality they said could threaten the well-being of countless American households—especially those that are low-income or otherwise marginalized.

That conclusion is not necessarily surprising. It mirrors a swath of existing research and is in line with advocacy efforts from financial firms, academics and green groups that for years have trumpeted their concerns about the financial perils of global warming.

But two elements of the document, said report co-author Nathaniel Keohane of the Environmental Defense Fund, are particularly noteworthy: who asked for it, and who backed it.

For starters, he said, the task force’s work was unanimously requested by all five CFTC commissioners—three Republicans, two Democrats—each of whom was appointed by President Trump. In his eyes, “the broad recognition by the CFTC that this is a real issue that needs to be addressed” is significant in itself.

And second, the conclusions were approved by the entire subcommittee, Keohane said. That group is made up of more than 30 representatives from a broad swath of organizations, including ConocoPhillips, Morgan Stanley, BP PLC and the Nature Conservancy.

Subcommittee Chairman Bob Litterman, who is a founding partner at New York-based investment firm Kepos Capital, agreed.

He highlighted the panel’s top-line recommendation, which implores Congress to establish a carbon price to help slash planet-warming emissions and force capital markets in a greener direction.

“Financial markets are very effective and efficient at allocating capital given the incentives that they face. Right now, we don’t have adequate incentives; therefore, capital is not flowing in the right direction. And the financial markets can’t change that on their own,” Litterman said.

“We have to slam on the brakes, and that’s what this report says in no uncertain terms,” he added. “And it doesn’t just say it from some crazy, left-wing perspective. This is ConocoPhillips and BP, along with every other participant.”

The subcommittee listed dozens of other recommendations that suggest ways that various regulators should incorporate climate considerations into their existing mandates.

For example, the Financial Stability Oversight Council—a panel established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act—should consider climate risk as it oversees national financial stability.

The Securities and Exchange Commission was likewise encouraged to review its guidance that dictates how companies report the climate risks they face. The task force wrote that modernizing that guidance, which dates back to 2010, would help “achieve greater consistency in disclosure to help inform the market.”

The report also called on financial regulators to join various international coalitions that for years have spearheaded efforts to address climate risk. Among them is the Network for Greening the Financial System, a group of more than 50 foreign central banks and regulators that are working to push financial systems to meet the climate goals of the Paris Agreement.

The Federal Reserve has yet to become a formal member of the network. Its absence stands in contrast to past statements by Fed Chair Jerome Powell, who on multiple occasions has acknowledged the central bank’s responsibility to ensure that major financial institutions are “resilient to the longer-term risks from climate change” (Climatewire, Feb. 12).

“The U.S. is the big problem right now,” said Litterman, who formerly directed risk management at Goldman Sachs Group Inc. “The Europeans are ready to move forward. The Chinese are ready to move forward. They are waiting for the U.S.”

To be sure, several panel members said their general approval of the document did not equate to support of every point in the final document.

Report co-author Daniel Paul, the manager of risk and regulatory affairs at ConocoPhillips, said in a statement that despite being broadly supportive of the report, its analysis and conclusions “do not necessarily reflect in every instance” the views of his company.

Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley said the same.

“We believe that with respect to certain recommendations, such as those around disclosure, there are challenges that require further study and examination by relevant authorities responsible for the development and implementation of any additional regulatory guidance or requirements within their regulatory scope,” the three firms wrote in a joint statement.

Nonetheless, experts said the report likely would guide how the CFTC, other financial regulators and the federal government handle climate-related risk.

“We have not yet addressed climate risk in the financial system. That is obviously a problem, and the report has 53 specific recommendations on how it can be addressed,” Litterman said. “Going forward, this is going to be an obvious question to every financial regulator and Congress. It’s obviously part of the national dialogue now.”

Reprinted from Climatewire with permission from E&E News. E&E provides daily coverage of essential energy and environmental news at www.eenews.net.