U.S. Financial Regulators Have a Duty to Steer Us Away From Climate-induced Financial Collapse
When it comes to protecting the U.S. economy from the impacts of climate change, our financial regulators are falling short.
The role of our financial regulators is to ensure sustainable, efficient markets that protect us from financial and economic disruptions. As we’ve seen over the years, however, they’re not always up to the task. Financial regulators failed to address subprime mortgage-backed securities risks that triggered the 2008 financial crisis that cost millions of jobs and 4.3 percent of the U.S. gross domestic product (GDP). Today, some of those same regulators, the Federal Reserve Board (the Fed) and the U.S. Securities and Exchange Commission (SEC), may be missing warning signs that could point to another financial cliff -- a potentially larger catastrophe triggered by climate change.
The U.S. economy has experienced more than a half-trillion dollars of direct losses over the past five years from climate-related extreme weather events, losing $45 billion in 2019 alone. California suffered yet another season of record-damaging wildfires, and Texas experienced its second 1-in-a-1,000-year flood event in just three years.
And it’s only getting worse. Low-lying coastal hubs like Miami are also drowning from rising sea levels - a trend that consultancy group McKinsey & Co. projects could reduce real estate values by as much as 15 percent in the next decade and twice that by 2050.
The National Bureau of Economic Research predict the U.S. economy could lose up to 10 percent of its GDP by 2100 if global emissions are not significantly reduced, dwarfing the 4.3 percent lost between 2007 and 2009. As the World Economic Forum (WEF) identified earlier this month, the top 5 risks to the global economy stem from climate change -- with the group’s president Børge Brende saying, “We have only a very small window and if we don’t use that window in the next 10 years we will be moving around the deck chairs on the Titanic.”
Across the pond, many European central banks are seeing the situation more clearly. The central banks of England and France made news by declaring in an open letter, “As financial policymakers...we cannot ignore the obvious physical risks before our eyes. Climate change is a global problem which requires global solutions, in which, the whole financial sector has a central role to play. If some companies and industries fail to adjust to this new world, they will fail to exist.”
The Bank of England’s regulatory body then announced plans to ask banks, insurers and asset managers to regularly conduct stress tests for climate resilience, showing they’re taking seriously their responsibility to safeguard their countries’ economies. Similarly, the central bank of The Netherlands has begun conducting stress tests of climate risks, and Norway’s central bank issued a statement saying that climate risks “must be integrated in the risk assessment and hence in the overall assessment of the capitalization and funding of financial institutions.”
Here in the U.S., we need the Fed and the SEC to follow suit. The Fed needs to supervise the extent to which investors and other financial institutions are integrating climate risk into their assessments, and mandate stress testing for climate-warming scenarios. It is their responsibility to assess how climate could affect the very stability of our capital markets - and to make sure that banks and insurance companies integrate such risks into their forecasting. By the same token, we need the SEC to mandate robust climate risk disclosure from companies. Having good information is critical to assess the extent of the economy’s exposure to climate risks, and the necessary responses.
We have seen encouraging signs recently. In November of 2019, the Federal Reserve Bank of San Francisco convened academics and researchers to discuss climate change’s impact on the economy. That same month, an executive vice president at the Federal Reserve Bank of New York said “climate change has significant consequences for the US economy and financial sector through slowing productivity growth, asset revaluations and sectoral reallocations of business activity." Just this month, the president of the Federal Reserve Bank of Dallas warned of climate trends threatening the economy and the financial system. “We’re seeing a frequency and intensity of weather events .. that they are starting to be more than tail events. They’re starting to affect economic outcomes.”
Even the chair of the Federal Reserve Board Jerome Powell has evolved his thinking. In November, he said, “climate change is an important issue but not principally for the Fed...we’re not going to be the ones to decide society’s response.” And then this week, Powell acknowledged that the Fed in fact does have a role to play in shoring up the U.S. economy in the face of climate risks. “The public has every right to expect and will expect that we will ensure that the financial system is resilient and robust against the risks of climate change,” he said at a press conference.
Some of the world’s largest asset managers and pension funds are sending signals that we must act, too. The CEO of the world’s largest asset manager, BlackRock, recently warned that climate risks are bigger than those of the 2007 recession, requiring a fundamental shaping of global finance. And this week, State Street reinforced its position that it would vote against the boards of companies that fall behind on environmental, social and governance (ESG) standards. Market intermediaries, such as credit rating agencies, and even stock exchanges have acted on these risks because there is a direct line to financial performance.
It’s beyond time for the financial regulators to heed these clear calls for action and demonstrate the kind of leadership we’re already seeing from regulators globally.
We, at Ceres, will work with regulators so that they better understand that climate change has the potential to upend the U.S. financial system. Through our recently launched Ceres Accelerator for Sustainable Capital Markets, we will help them recognize climate change as a systemic financial risk -- and act on it with appropriate speed and urgency.
It is imperative that these regulators fulfill their role as protectors of the economy, and steer the U.S. away from the brink of a climate-induced financial collapse.
Mindy Lubber is the CEO and President of Ceres. The sustainability nonprofit organization launched the Ceres Accelerator for Sustainable Capital Markets (the “Ceres Accelerator”) to transform the practices and policies that govern capital markets in order to accelerate action on reducing the worst financial impacts of the global climate crisis and other sustainability threats.