A panel of top U.S. regulators is declaring climate change a threat to financial stability and recommending federal agencies require companies to disclose the risks they face from global warming, as well as their emissions.
The Financial Stability Oversight Council — which comprises top officials at agencies, such as the Federal Reserve and Securities and Exchange Commission, and is chaired by Treasury Secretary Janet Yellen — issued a report concluding climate change poses an “emerging and increasing” risk to financial stability.
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Along with disclosing risks, the council also recommends regulators require banks to use scenario analysis as a tool for assessing climate-related financial risks.
The report marks the first time U.S. regulators have cited climate change as a systemic risk to the financial system, which government officials said sends an important signal to other countries ahead of a major U.N. climate summit in Glasgow, Scotland, later this month.
“This is a very significant first step,” a senior Treasury Department official told reporters on a call. “It represents a commitment from the entire U.S. financial community.”
FSOC was created under the Dodd-Frank Act in the wake of the 2008 financial crash to address emerging risks to the economy. The report was called for in President Joe Biden’s Executive Order on Climate-Related Financial Risk in May.
The council’s recommendations could lay the groundwork for Biden administration agencies to issue regulations requiring disclosure. The Securities and Exchange Commission has already taken steps toward developing a new mandatory disclosure rule, and other agencies should follow suit.
“What they have done is crack open the door to financial regulation,” said Justin Guay, director of global climate strategy at Sunrise Project, an environmental group. “We don’t know how far through the door they will go. If I was sitting in a board room or at a bank, I would feel uncomfortable.”
Some companies voluntarily report their emissions and the risks they face from climate change, but such disclosures are inconsistent and difficult to compare.
Meanwhile, Republicans have criticized the SEC’s efforts to establish climate disclosure, arguing the effort and other climate finance moves from the Biden administration are veiled efforts to choke off financing from fossil fuel producers.
“The real risk here is of a political nature,” said Sen. Pat Toomey of Pennsylvania, the top Republican on the Finance Committee. “This could open the door to unelected, unaccountable financial regulators misusing their powers to choke off capital to energy companies and weaken the economy.”
But liberal climate change activists said the council’s report failed to push regulators to discourage banks lending to companies that produce large amounts of fossil fuels that are the main cause of global warming.
“When the Biden administration’s entire climate agenda is hanging by a thread and Glasgow is around the corner, it’s a bit baffling they didn’t go further,” Guay told the Washington Examiner.
For example, the council could have called on regulators to enact higher capital requirements that would make it more expensive for banks to lend to companies that produce high emissions from fossil fuels.
The European Central Bank announced Thursday it is considering issuing capital requirements to dissuade banks from lending to fossil fuels.
The Bank of England has begun stress testing the U.K. financial system against climate risks, while the Bank of France has pledged to do the same.
The council report stops short of recommending stress tests that would measure banks’ exposure to climate change-related risks, instead calling for scenario analyses, a lower threshold, analysts say.
A senior Treasury Department official acknowledged to reporters the United States is lagging behind its European peers in addressing climate risk but said the country is catching up.
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“The whole purpose is to communicate that we are ready. Are we behind? Of course we are. And this is the step we are taking to catch up and put ourselves in a leadership role internationally,” the official told reporters.
