Monday, December 02, 2019

Climate change threatens financial stability: Center for American Progress

By J. Preston Carter, J.D., LL.M.

A climate change brief published by the Center for American Progress details the potential risks that climate change could cause for the global financial system and looks at the role that financial regulators can play in mitigating these effects. As the incidence of catastrophic weather events and other devastating environmental changes caused by climate change continues to rise, so do estimates of the economic price of managing the effects of the crisis. One estimate, according to the report, suggests that global economic losses stemming from climate change could surpass $23 trillion per year—far exceeding the cost of the Great Recession.

"The United States is far behind other nations when it comes to mitigating the effects of climate change on the global economy," said Gregg Gelzinis, policy analyst for Economic Policy at the Center for American Progress and one of the report’s co-authors. "Climate change falls squarely within the jurisdiction of financial regulators. Not acting to build a 100 percent clean future would be clear negligence."

"Every day, Wall Street funnels billions of dollars of our hard-earned savings into dirty businesses such as fossil fuels and commodities companies," said Graham Steele, director of the Corporations and Society Initiative at Stanford Graduate School of Business and co-author of the report. "By failing to properly account for the true financial risks of climate change, our financial watchdogs are subsidizing a potential climate crisis."

The authors’ brief—Climate Change Threatens the Stability of the Financial System—states that the chief ways climate change could affect the global financial system include: physical risks, as mortgages, commercial and agricultural loans, and other assets on bank balance sheets are susceptible to losses related to severe weather and environmental changes; and the price shock of a transition to a greener economy, stranding assets in the fossil fuel sector and decreasing the value of other assets sensitive to the price of carbon.

The report recommends steps to protect the economy from climate change:
  • The Federal Reserve should join the Network for Greening the Financial System, the international group of central banks and financial regulators working to mitigate the effects of climate change to the financial system.
  • The Financial Stability Oversight Council should direct the Treasury Department’s Office of Financial Research to coordinate with member agencies on increasing interagency resources devoted to analyzing climate-related threats to the financial system.
  • The Securities and Exchange Commission should require public companies to disclose information on the risks that climate change poses to their businesses.
  • The Fed should establish climate change stress tests to help ensure that large financial institutions are resilient to severely adverse climate scenarios.
Recently proposed legislation in the House and Senate calls for the Fed to conduct climate change stress tests every two years on the same large financial institutions that are currently subject to Comprehensive Capital Analysis and Review stress tests.