Climate Change and U.S. Financial Regulators: Overview and Recent Actions

Climate Change and U.S. Financial Regulators: Overview and Recent Actions

INSIGHTi
Climate Change and U.S. Financial
Regulators: Overview and Recent Actions
Updated August 26, 2021
Under the Biden Administration, financial regulators have announced a range of new measures to address
financial risks associated with climate change. The Department of the Treasury, 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. 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 relatively large. In the housing
market, one paper found that, as of 2019, 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.
Almost al insured U.S. flood risk is backstopped by the U.S. government through the National Flood
Insurance Program.
There is evidence that investors are already seeking to 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 affected by
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climate change paid more in underwriting fees and initial bond yields when issuing long-term municipal
bonds.
Recent Actions
Treasury
On January 27, 2021, the White House issued an executive order promising to expand financing
international y for projects to reduce GHG emissions or promote climate adaptation, and on April 22,
2021, released its International Climate Finance Plan focused on ways to mobilize public and private
funds international y toward climate-friendly goals. That plan involves the Department of the Treasury
working with other U.S. government agencies and multilateral development banks to manage climate-
related risks international y. In a July 11, 2021, speech, Secretary Janet Yel en noted the United States
would double by 2024 its annual public climate finance for developing countries to about $5.7 bil ion per
year and triple its public finance for climate adaptation to about $1.5 bil ion.
In an April 21, 2021, speech, Yel en detailed how Treasury would look at international cooperation, tax,
and macroeconomic policy issues to promote climate goals and stressed the importance of making climate
risk disclosures more standardized and clearer. This would enable investors to compare risks across
companies and 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 investors demand higher
returns for climate risk. Some argue, however, that assessing “actionable” climate risks for investors can
be chal enging or misguided. Others argue disclosures alone may prove 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.
Securities and Exchange Commission
SEC Chair Gary Gensler in a July 28, 2021, speech said he had requested the SEC’s staff develop a
mandatory climate risk disclosure rule proposal for the commission’s consideration by the end of 2021 to
update the agency’s 2010 guidance. Gensler noted that such mandatory disclosures should be “consistent
and comparable,” enabling investors to compare both qualitative and quantitative metrics across
companies, including those related to GHG emissions, financial impacts of climate change, and progress
toward climate-related goals. 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.
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.

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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 assess and address climate-related risks to financial stability.
Fed Vice Chair for Supervision Randal Quarles spoke about the Financial Stability Board’s publication
of a roadmap for addressing international climate-related financial risks in a July 2021 speech. The FSB
roadmap supports coordination of climate disclosures for standard-setting bodies international y. 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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