Faced with pressure from Congressional Democrats and the need to keep President Biden’s campaign pledges, Treasury Secretary Janet Yellen is calling on financial regulators under her leadership to take action to reduce climate change risks.
These regulators have traditionally worked to ensure that banks remain strong, markets remain competitive, and investors receive fair and accurate information. Now Ms Yellen is relying on agencies such as the Federal Reserve and the Securities and Exchange Commission to respond to what she says is the urgent threat posed by climate change to the economy and financial assets, such as a wallet from low mortgages located coastal areas or support from an insurance company to drought-prone farmland.
She is walking a tightrope. Many Republicans and industry advocates say financial regulators shouldn’t get deeply involved in environmental policy. Progressive Democrats want bold action quickly. Ms. Yellen has sought to put climate issues high on the agenda of regulators, while personally pushing for related legislation and pushing the private sector.
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“We are not an environmental agency,” Ms. Yellen said in an interview with the Wall Street Journal about the role of the Treasury Department on climate issues. “But we can and are trying to play a very important role in helping our country and the world to solve this problem.”
Now the agencies that Ms. Yellen is summoning as chair of the Financial Stability Supervisory Board, or FSOC, a coalition of regulators established in the aftermath of the 2007-2009 recession, are taking their first steps.
The Office of the Comptroller of the Currency, a branch of the Treasury, plans to release a framework of its expectations for how big banks should manage climate risk soon, with detailed guidance to follow next year. The Fed is working on a so-called scenario analysis to model the financial risks associated with climate change. The SEC plans to release a proposed rule early next year to strengthen mandatory disclosures on climate risks and has sent letters to dozens of publicly traded companies asking them to provide more information to investors. on how climate change might affect profits.
As a comprehensive approach to the issue, the FSOC released a report in October in which the group formally identified climate change as an emerging and growing risk to US financial stability, opening up the possibility of action. more regulatory.
The actions indicate that the financial sector can expect a heavier compliance burden and increased scrutiny from Washington over the administration’s environmental concerns. But the regulatory push is under scrutiny from the financial sector and various political corners.
“I agree that global warming is real. However, it does not follow that there is a new systemic risk to the financial system, ”Senator Pat Toomey (R., Pa.), Member of the Senate Banking Committee, said at a hearing in Congress. in October. “We have had severe weather events since the dawn of time. “
Fossil fuel companies remain among the most valuable and widely traded companies in the world, and Mr Toomey said he believes financial regulators are ultimately seeking to deprive them of capital.
Meanwhile, the Biden administration is under pressure from progressives to do more to keep Mr. Biden’s promises ahead of next year’s midterm elections. During his presidential campaign, Biden said the United States should be an international leader on climate policy, set targets to reduce greenhouse gas emissions, encourage investment in renewable energy and efficiency and reduce their dependence on fossil fuels.
Pressure on regulators to act has increased because other aspects of the White House climate agenda remain mired in the president’s $ 2 trillion social spending program, which was not passed by the President. Congress, and some have been removed from this bill entirely.
Progressive lawmakers have shied away from Mr. Biden’s re-appointment of Jerome Powell as chairman of the Federal Reserve on the grounds that the institution is not doing enough to address climate-related risks.
Hurricanes, droughts and other weather events linked to climate change “destroy homes, roads and bridges, as well as other physical and financial assets,” said Senators Sheldon Whitehouse (D., RI) and Jeff Merkley (D., Ore.) In a statement last month. “The economic losses… are likely to be greater in total than those suffered during the housing crisis and the Great Recession.”
When Mr Biden announced he would reappoint the Fed chairman, he said Mr Powell made it clear that a “top priority would be to accelerate the Fed’s efforts to cope and mitigate the risk that the climate change is straining our financial system and our economy. “
Ms. Yellen, for her part, has long considered the potential risks of climate change, which she describes as twofold.
First, there are the so-called physical risks due to more extreme weather conditions or more frequent disasters for communities and clients served by financial institutions. A lender, for example, could increasingly face mortgage losses covering homes that could be destroyed by more frequent flooding or forest fires.
Granted, a recent New York Fed study found that weather disasters had had minimal effects on the performance of U.S. banks over the past quarter-century, in part because local knowledge had likely helped them avoid lend in vulnerable areas.
But there are also transition risks stemming from government or society’s efforts to wean the economy off fossil fuels. For example, a bank heavily invested in industries that emit greenhouse gases could theoretically see a decline in the value of those assets if the company increasingly adopts different energy sources.
Ms Yellen said regulators could potentially implement measures, including requirements that banks hold capital as a buffer against climate risks, an idea the banking industry opposes.
“Regulators, as part of their safety and soundness mandates, will need to decide whether risks are being appropriately managed by these institutions,” Ms. Yellen said. “In theory, they might decide that more capital is needed to manage risk in particular industries,” she said.
Alex Martin, senior policy analyst at Americans for Financial Reform, said the FSOC report missed an opportunity because it did not offer more suggestions on how regulators can mitigate climate risks, rather than analyze them.
“The FSOC has the capacity to help us solve this problem if the president boldly leads it,” said Martin.
Banking lobby groups said the FSOC report took a reasonable approach. Yet they are watching the movements of regulators for signs of more aggressive action, such as the enactment of climate-related capital requirements.
“There are some very important and specific concerns in trying to incorporate climate change type risks” into the capital requirements, said Sean Campbell, chief economist at the Financial Services Forum, an advocacy organization representing the big banks. . Mr Campbell said such requirements would face a “square peg and round hole problem” as the capital requirements are intended to cushion unforeseeable short-term losses and not long-term problems such as change. climate.
The decades-long time horizon of climate change injects uncertainty into estimating potential effects, posing a challenge to regulators.
Others say the push in climate issues is overblown. Jay Clayton, who led the SEC under the administration of former President Donald Trump, said financial agencies have clear powers. Issues that go beyond those powers, he said, should be decided by Congress.
“As long as they continue to go far enough away from their original goal,” Mr. Clayton said, “this is going to cause a lot of problems.”
Ms Yellen disagrees and said regulators have a responsibility to identify risks and make sure the financial system is prepared. But there are limits, she said: regulators “don’t have a legal mandate to just say to lenders, ‘You shouldn’t be giving these loans, for example, to energy companies because it hurts. the environment.’ “
Write to Amara Omeokwe at [email protected] and Paul Kiernan at [email protected]
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