Regulators take first steps to head off a climate financial crisis - The Hill
Regulators take first steps to head off a climate financial crisis | The Hill
On Tuesday, three major federal financial regulators released joint guidelines on the steps banks must take to prepare for a climatic assault on their balance sheets.
The potential risks are dire, wrote representatives of the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
The regulators focused on two ways that a warming climate could lead to financial upheaval. The first was physical damage from floods, fires and storms, while the second involved the “transition risk” related to broad economic changes and slow shifts away from fossil fuels.
In both cases, these “pose an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States,” the agencies wrote.
The three regulators collectively called on bank boards to take concrete steps to “control [their] exposure” to the financial risks of climate change.
The regulators also urged banks to conduct a “scenario analysis,” in which they would forecast what could happen to their investments — and, by extension, the deposits they hold — under circumstances of extreme climate disruption.
Progressive watchdog group Public Citizen offered qualified praise of the new guidelines.
“These principles have taken far too long to produce, but they are a solid start,” group climate director David Arkush said in an emailed statement.
But Arkush noted that the devil would be in the details.
For example, he called on federal regulators to give banks more specific guidance on what kind of climate scenarios to incorporate, as well as how to create “credible” strategies to meet their decarbonization goals.
Republicans have long equated proposed guardrails around climate risk with an assault on U.S. oil and gas, and GOP congressional members attacked the new proposal.
“Banks were not created to be arbiters of public policy, but now environmental activists have seized our nation’s financial regulators and are inserting their political preferences into the equation,” Sen. Kevin Cramer (R-N.D.) said in a statement.
Cramer cited North Dakota’s “innovative clean-energy” solutions as evidence that such guidelines are unnecessary. The state gets about 6 percent of its energy from renewables, which include carbon-emitting biofuels.
For the sake of comparison, the state gets 8 percent of its energy from coal, and the lion’s share of the rest from oil and gas.
But the agencies said that they had stayed far away from activism.
They emphasized in their statement, for example, that they had ignored public comments calling for them to “promote a transition to a lower carbon economy” — something that they argued went beyond regulators’ role.
If banks wanted to keep funding oil and gas, regulators implied, that was their business — so long as the risks were properly accounted for.
“If banking regulators and the Financial Stability Oversight Council pick up the pace, they might still prevent climate-related financial crises,” Arkush said.
Related Knowledge Center: Climate economics
Climate change is now a driver of the world’s economy. The impact is profound:
- Catastrophic weather events — hurricanes, floods, droughts, high temperatures — are more frequent and more extreme. The cost can be measured in both the initial damage caused and the longer-term impact on the economy.
- Vulnerable communities are increasing climate-related investments, hardening infrastructure and taking other protective measures.
- Investment in carbon capture and storage technologies is increasingly rapidly.
- Governments are making investments and crafting regulations to reduce emissions of carbon dioxide and other greenhouse gases.
On top of all of this is the cost of uncertainty. As the Fourth National Climate Assessment, released in 2018 by the U.S. Global Change Research Program, says, “The assumption that current and future climate conditions will resemble the recent past is no longer valid.”