INSIGHTi
Climate Change and U.S. Financial
Regulators: Overview and Recent Actions
May 11, 2021
Under the Biden Administration, financial regulators have announced a range of new measures to address
financial risks associated with climate change. The Treasury Department, the Securities and Exchange
Commission (SEC), and the Federal Reserve have each announced new steps:
 The Treasury’s announcement covers a range of issues including public spending,
macroeconomic effects, and international cooperation.
 The SEC’s addresses investor disclosure requirements relating to climate risks and the
classification of funds marketed to investors as environmental y friendly.
 The Fed’s relates to lending risks for individual financial institutions and to systemic
financial risks related to climate change.
This Insight provides an overview of these actions and how they interrelate.
Background: Financial Sector Climate Risks
An international standard-setting body, the Financial Stability Board, has noted that climate change can
affect financial stability and asset prices either through physical risks such as more damaging storms and
wildfires or through transition risks in which changes in government policies or market perceptions might
lead to sudden asset price changes, such as for industries that emit greenhouse gases (GHGs). For
instance, in any transition to a net-zero GHG emissions economy, fossil fuel industry assets might lose
value. By some estimates, assets held by fossil fuel companies global y could drop between $250 bil ion
and $1.2 tril ion or become “stranded assets” in a possible transition away from fossil fuels.
Estimates of potential losses to the financial sector from physical risks are also relatively large. In the
housing market, one paper found that, as of 2019, the government-sponsored enterprises, Fannie Mae and
Freddie Mac, guaranteed $6.88 tril ion in home mortgage debt without pricing flood risk into their
guarantee fees—risks ultimately backstopped by the U.S. government. Almost al the U.S. flood risk that
is insured is also backstopped by the U.S. government through the National Flood Insurance Program.
There is evidence that investors are already seeking to accurately price climate risks into asset prices. In
the roughly $4 tril ion U.S. municipal bond market, one paper concluded that counties more likely to be
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affected by climate change paid more in underwriting fees and initial bond yields when issuing long-term
municipal bonds.
Recent Actions
President Biden announced on April 22, 2021, a voluntary target for the United States to achieve a 50%-
52% reduction from 2005 levels in economy-wide net GHG emissions by 2030, although specifics for
achieving it have not yet been released. The White House also issued an executive order on January 27,
2021, promising to expand financing international y for projects to reduce GHG emissions or promote
climate adaptation. A White House International Climate Finance Plan, released April 22, 2021, focused
on ways to mobilize public and private funds international y toward climate-friendly goals.
Treasury
The White House plan involves the Treasury Department working with other U.S. government agencies
and multilateral development banks on international cooperation and with U.S. financial regulators to
manage, and improve information on, climate-related risks. In an April 21, 2021, speech, Secretary Janet
Yel en provided details on how Treasury would look at international cooperation, tax, and macroeconomic
policy issues to promote climate goals.
Yel en stressed that one key issue was climate risk disclosures. Making these disclosures clearer and more
standardized would enable investors to better compare risks across companies and would drive capital
toward cleaner energy, Yel en noted. Clearer climate disclosures—the purview of regulators such as the
SEC—could impact GHG emissions targets if they drive investors toward “clean energy” projects or if
investors demand higher returns for climate risk. Disclosure efforts may be spearheaded by financial
regulators but have ramifications for the broader White House plan. Some argue, however, that assessing
“actionable” climate risks for investors can be chal enging or misguided. Others argue disclosures alone
may be insufficient to mitigate systemic risks.
Yel en announced April 19, 2021, the creation of a “climate hub” within Treasury to coordinate three
areas: (1) climate transition finance, (2) climate-related economic and tax policy, and (3) climate-related
financial risks. She also stated that Treasury would coordinate with the U.S. Financial Stability Oversight
Council to mitigate climate risks to financial stability and improve climate risk information.
Securities and Exchange Commission
SEC Chair Gary Gensler pledged, in response to congressional questions, to continue work on enhancing
climate-related disclosures. In February, 2021, Al ison Herren Lee, then acting SEC chair, directed the
SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosure in public
company filings. She said the SEC would update its 2010 guidance on disclosure of climate change risks
and would assess compliance related to that guidance.
The SEC also announced in March 2021 the creation of a “Climate and ESG [Environmental, Social, and
Governance] Task Force” within the SEC’s Division of Enforcement to identify misconduct related to
funds branded as ESG. In recent years, funds marketed to investors as “ESG” have grown markedly, but
there is no universal y agreed-upon or legal y binding definition of what constitutes an ESG fund. In April
2021, the SEC’s Division of Examinations warned that a review it conducted of ESG funds found a
number of misleading statements regarding ESG investing processes and adherence to voluntary global
ESG frameworks, among other issues.

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Federal Reserve
On January 25, 2021, the Fed announced the creation of an internal Supervision Climate Committee to
strengthen its “capacity to identify and assess financial risks from climate change” and “develop an
appropriate program to ensure the resilience of supervised firms to climate-related financial risks.” In a
March 2021, speech, Fed Governor Lael Brainard announced the creation of a Financial Stability Climate
Committee at the Fed to identify, assess, and address climate-related risks to financial stability from a
macro-prudential perspective. On the international front, the Fed announced in December 2020 it had
formal y joined the Network for Greening the Financial System, a group of over 80 central banks focused
on climate-related risks that has begun developing methodologies for conducting climate stress testing.
Also, the Fed is co-chairing the Basel Committee on Banking Supervision’s Task Force on Climate-
Related Financial Risks.


Author Information

Rena S. Miller

Specialist in Financial Economics




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