US regulators unveil blueprint to tackle financial climate risks

In a photo from Oct 10, 2019, a wind-driven wildfire burns near a power line tower in Sylmar, California.
In a photo from Oct 10, 2019, a wind-driven wildfire burns near a power line tower in Sylmar, California.PHOTO: REUTERS

WASHINGTON (REUTERS) - Climate change is an "emerging threat" to US financial stability that regulators should address in their everyday work, a top US regulatory panel said on Thursday (Oct 21), a first for the United States which has lagged other wealthy countries on tackling financial climate risks.

The Financial Stability Oversight Council (FSOC) issued a 133-page report that could ultimately lead to new rules and stricter oversight for Wall Street. It provided a road map for integrating climate risk management into the financial regulatory system.

That includes filling in data gaps, pushing for public climate-related disclosures by companies, beefing up climate change expertise at the agencies, and building tools to better model and forecast financial risks, such as scenario analysis.

The FSOC comprises the heads of the top financial agencies and is chaired by Treasury Secretary Janet Yellen. Created following the 2007-09 financial crisis, its role is to identify and address vulnerabilities in the US financial system.

The report is part of US President Joe Biden's plan to aggressively tackle climate change and comes ahead of his trip to Glasgow, Scotland, for a United Nations climate summit.

"It's a critical first step forward to the threat of addressing climate change, but will by no means be the end of this work," Yellen said of the report.

With Biden's climate agenda stalling in a divided Congress, the report will send a signal to the rest of the world that the United States is serious about tackling systemic climate risks and add to the global debate on the issue.

"This is the first time that all of the banking and financial regulators will come out in one document and talk about what they can do on climate change," said Todd Phillips, director of financial regulation at the Center for American Progress, a liberal think-tank.

Climate change could upend the financial system because physical threats such as rising sea levels, as well as policies and carbon-neutral technologies aimed at slowing global warming, could destroy trillions of dollars of assets, risk experts say.

In a 2020 report, the Commodity Futures Trading Commission (CFTC) cited data estimating that US$1 trillion to US$4 trillion (S$1.35 trillion to S$5.39 trillion) of global wealth tied to fossil fuel assets could ultimately be lost.

With a record US$51 billion pouring into US sustainable funds in 2020, investors are also pushing for better information on the risks companies face from climate change.

US regulators, however, have done little to date to tackle climate risks, and the United States lags its peers on the issue. Biden, a Democrat, has said he wants every government agency to begin incorporating climate risk into their agenda.

The report also calls for the FSOC to create two new internal committees. One would consist of regulatory staff who will frequently report on efforts to police climate change risks. The second will be an advisory committee of outside experts, including from the academia, non-profits and the private sector, to inform the agencies' efforts.

The lack of recommendations for tough new rules could frustrate progressives and environmental groups, who are anxious for Washington to take radical steps to address what Biden himself has called an existential crisis.