Securities Regulation Daily Senators call for strong climate change action from financial regulators as the Biden Administration prepares to take power
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Friday, December 18, 2020

Senators call for strong climate change action from financial regulators as the Biden Administration prepares to take power

By Brad Rosen, J.D.

A panel of top financial regulators took on the complicated issue of climate change, the significant risks it poses to financial system, and the need to take urgent action to address and mitigate these risks.

As the Biden Administration prepares to assume power in about a month’s time, the Center for American Progress hosted an online conversation focusing on climate change risks and financial regulation, one of President-elect Biden’s stated priorities and a key issue during the campaign. The program, titled, The Financial System & Climate Change: A Regulatory Imperative featured Senator Brian Schatz (D-HI) and Sherrod Brown (D-OH), along with leading financial regulators, and explored the damage climate change could inflict on the financial system and broader economy, and further considered how regulators have begun to integrate climate risk into their financial regulatory frameworks.

The program’s first panel included CFTC Commissioner Rostin Behnam, SEC Commissioner Allison Herren Lee, FDIC Director Martin J. Gruenberg, and Linda A. Lacewell, superintendent, New York State Department of Financial Services. The panel was moderated by Andres Vinelli, Vice President for Economic Policy, Center for American Progress.

A climate game plan for regulators. In his opening remarks, Schatz highlighted four concrete steps that could be taken immediately to avert a climate driven financial crisis. These include:

  • The Fed and banking regulators need to include climate risk as part of their bank supervision and important part of this will include stress testing.
  • The Fed should include climate risk as part of its monetary policy and not just part of its balance sheet management.
  • The SEC needs mandate climate risk disclosure for publicly traded companies.
  • The Biden Administration will need to immediately stop, if not reverse, rules which prevent companies from considering climate change in their business decisions.

Schatz emphasized that the agencies do not need any new statutory power to take these steps. He stated, "In fact, they can proceed immediately, as they have the authority and the responsibility to manage risks to the financial system and this includes financial risks."

A roadmap for action from the CFTC. During the panel discussion, there were many references to the seminal report Managing Climate Risk in the U.S. Financial System, which was issued by a subcommittee of the CFTC’s Market Risk Advisory Committee (MRAC). Commissioner Behnam, the sponsor of the MRAC and a driving force behind the report, noted that the paper contained 53 actionable recommendations to mitigate the risks to financial markets posed by climate change. Behnam also pointed to the subcommittee’s diverse composition, which consisted of representatives from the banking, agricultural, energy, and insurance industries, as well as institutional investors, data providers, environmentalists, and academia. The subcommittee approved the report on a 34-0 vote.

Behnam highlighted three takeaways from the report:

  • The need for international harmonization. Climate change is global problem and requires global cooperation. The commissioner pointed to Federal Reserve Board recently joining the Network for Greening the Financial System (NGFS), noting this is a huge signal to the international community that the US is back and ready to work collaboratively on climate issues; and,
  • Environmental justice. Many of the report’s recommendations recognize the heightened impact climate change has on low and moderate income populations and rural communities. It also addresses potential unintended consequences that could result from climate change policies impacting these groups.
  • An opportunity document. The report shows how climate change policy fosters rebuilding the economy, creating American jobs, and supporting labor. Climate change policy can be positive for the economy.

A focus on disclosure and collaboration. SEC Commissioner Allison Herren Lee noted the impacts of climate risks are felt across the financial system, and we cannot afford to stay in our regulatory silos or adopt a stay-in-my lane mentality. In her view, addressing these problems starts with disclosure, which is the core mission of the SEC. Some of Lee’s observation on this score included:

  • there will be a greater need for greater cooperation among various regulators;
  • there is a need for more information and information that his more reliable;
  • disclosures from companies that finance the carbon emitting activities of other organizations will need to be magnified; and,
  • complications arising from an uptick in voluntary disclosures from some companies will need to be addressed. Uniform and standardized approaches will need to be adopted with regard to the information and data that is obtained.

Herren Lee also stated that investment advisors and credit rating agencies will need to consider climate risk related issues, as well as the impact of ESG factors on their respective activities.

The American people want to take on climate change. In his closing remarks, Senator Sherrod Brown proclaimed that the American people know that climate change is real. They also recognize how it is impacting their lives from unprecedented flooding, to an increase in forest fires, to more and increasingly devasting hurricanes. He observed that Joe Biden was elected president by 7 million votes, largely because of this issue.

Brown also lambasted President Trump, noting the administration set up the government to fail, and then said that government can’t get anything done. He further noted that government scientists were not even allowed to say the phrase "climate change, much less do anything about it. Moreover, this administration also allowed China to take the lead in green related activities. "This will change on January 20, and we don’t need Mitch McConnell’s blessing to do so," Brown stated.

Brown sees the need for an all of government approach, and he is confident that the various regulatory agencies understand the urgency at hand to take swift action. Brown also sees climate action not only as a risk, but as an opportunity, and the need to sell people on a positive vision. He pointed to the possibility of electric cars being built in Youngstown and creating American jobs, as well as replacing 60,000 city buses with those with zero emissions, all built in the U.S.

In Brown’s view, good environmental policy is good economic policy, where decent jobs with decent wages will be created. He added, "that’s how we’ll address climate change."

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