FSOC: Climate change is threat to US financial stability

The Financial Stability Oversight Council (FSOC) has published a report highlighting climate change as an “emerging and increasing threat to US financial stability”. This is the first time the Council has acknowledged such a risk, which follows an increasing trajectory towards ESG, and climate-change focus for US financial institutions.

The 133 page report, which was executed by request from President Biden in Executive Order 14030, Climate-related Financial Risk, looks to explore the impact of climate change on the US economy and the economic adjustments needed to the financial system. It identifies climate change as an emerging threat to the financial stability of the US for the first time and recognises that the “economic costs from climate change are expected to grow.”

Within the report, the FSOC noted that there is a substantial amount of work that needs to be done to tackle climate-related risks, and calls on financial institutions, public companies and regulators to work together to develop a common agenda to respond to climate change.

Four recommendations

The FSOC also published a Fact Sheet as an accompaniment to the report, as a means of summarising its findings. The key recommendations from the report aim to “support the ongoing and urgent whole-of-government effort to address climate change”. In particular, the fact sheet sets out four key recommendations:

1. Building capacity and expanding efforts to address climate-related financial risks
2. Filling climate-related data and methodological gaps
3. Enhancing public climate-related disclosures
4. Assessing and mitigating climate-related risks to financial stability

CUBE comment

Secretary of the Treasury, Janet Yellen, has said that this report and its recommendations “represent and important first step towards making our financial system more resilient to the threat of climate change”. I think, however, “first step” discredits the work that we’ve seen coming out of US financial institutions and regulators over the past year.

The risks presented by climate change are not limited by jurisdiction. Of course, there will be some countries that are worse affected than others, but broadly speaking climate change is a global issue that doesn’t stop at state or country borders. For financial regulators and regulations, the opposite is generally true.

And it isn’t the first move from the SEC, or indeed any of the US’s regulators, that show mettle with regard to ESG. As a recap, we have seen the following activity in the last few months alone:

• In late September the SEC published a sample letter that highlighted the mistakes that firms are making with regard to climate-change related disclosures.
• In August, the SEC approved controversial Nasdaq diversity plans that will introduce measures aimed at increasing the number of women, racial minorities and LGBTQ+ people on US corporate boards.
• Also in August, the US Office of the Comptroller of the Currency appointed its first ever Climate Change Risk Officer.
• Over the summer, SEC Commissioners passionately debated the emergence of ESG disclosure rules, with Allison Herren Lee advocating for corporate boards to “integrate climate and ESG into government practices”.
• In June, the SEC’s regulatory agenda proposed new disclosure rules for climate change, human capital, corporate board diversity and cybersecurity risk and governance. Public comment on the matter is ongoing.
• In March, the CFCT opened a climate risk unit to explore the role of derivates when considering climate-related risks.
• The Federal Reserve Board has established two committees focussed on understanding and managing climate risks within its supervisory activity.

So while the US may have been slightly slow in its pick-up of ESG, and particularly climate-related risks, it now looks to be making up for lost time. While the move to tackle climate change is not new, what is new is the coming together – or at least the proposed coming together – of a number of financial regulators to coordinate their efforts.

Implementing a new regulatory structure is difficult at the best of times but is particularly difficult in a country such as the US, where it is difficult to reach consensus on rules and regulations. As the global economy wakes up to the need for global regulatory standards for ESG, the US may struggle to implement a cross-county standard. Let alone on a global scale.

What will this mean for US firms? More complexity, less efficiency, and more hours spent trying to grapple with emerging regulations. I’ve no doubt that emerging regulations and expectations for climate-related risks may be a headache for firms at first, but it’s surely better to grab the bull by its horns now, rather than waiting until it’s too late.

CUBE solves complex regulatory compliance across all areas of business, from ESG to prudential and financial crime.