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Examining Climate Risks and Financial Stability

In a first under the Biden Administration, a committee under the U.S. Department of Treasury has identified climate change as an “emerging and increasing threat to U.S. financial stability.” 

The new report by the Financial Stability Oversight Council (FSOC) was created after President Biden signed Executive Order 14030 on May 20 which ordered the U.S. Treasury to develop a comprehensive strategy to measure the climate-related financial risk to federal programs and assets. 

According to a press release, the aim of the report is to: 

  • Assess climate-related financial risks to financial stability, including through scenario analysis, and evaluate the need for new or revised regulations or supervisory guidance to account for climate-related financial risks; 
  • Enhance climate-related disclosures to give investors and market participants the information they need to make informed decisions, which will also help regulators and financial institutions assess and manage climate-related risks; 
  • Enhance actionable climate-related data to allow better risk measurement by regulators and in the private sector; and 
  • Build capacity and expertise to ensure that climate-related financial risks are identified and managed. 

“Climate change is an emerging and increasing threat to America’s financial system that requires action,” Secretary of the Treasury Janet L. Yellen said. “FSOC’s report and recommendations represent an important first step towards making our financial system more resilient to the threat of climate change.  These measures will support the Administration’s urgent, whole-of-government effort on climate change and help the financial system support an orderly, economy-wide transition toward the goal of net-zero emissions.” 

The report includes 30 specific recommendations financial regulators can take to identify and address climate-related risks to the financial system and promote financial resilience in the face of a changing climate. 

“While FSOC members have already begun to address climate-related risks within their respective mandates and authorities, today’s report demonstrates FSOC’s and its members’ commitment to building on and accelerating existing efforts, while ensuring robust coordination across agencies,” said a press release on the announcement. “These recommendations also ensure that climate-related financial risks will remain a key focus area going forward.” 

The report also recommends that committee members take new actions on the data, disclosure, and scenario analysis that will further its research. It also lays out how individual agencies are already taking important steps forward, such as: 

  • The Securities and Exchange Commission has begun to evaluate its disclosure rules and requested public comment on ways to improve climate disclosure. 
  • The Federal Reserve Board has established two committees to develop a better understanding of climate-related risks and incorporate them into its supervision of financial firms and into its financial stability framework.  
  • The Commodities Futures Trading Commission has engaged on climate-related financial risk issues through its Market Risk Advisory Committee. In September 2020, the MRAC’s climate subcommittee issued a report entitled Managing Climate Risk in the U.S. Financial System, with recommendations to address the growing impact of climate-related financial risk. 
  • Both the Federal Housing Financing Agency and the Treasury Department’s Federal Insurance Office have requested information on climate-related financial risks from the public to inform their activities 

Looking back, the committee was formed as a direct result of the Dodd-Frank Act that was signed into law in 2010. The goal of the committee is to identify risks to U.S. financial stability, promote market discipline, and respond to emerging threats to the financial system (which now includes climate change). The committee consists of 15 members, 10 of which have voting privileges. 

A full copy of the 129-page report can be found here.  

About Author: Kyle G. Horst

Kyle G. Horst is a reporter for DS News and MReport. A graduate of the University of Texas at Tyler, he has worked for a number of daily, weekly, and monthly publications in South Dakota and Texas. With more than 10 years of experience in community journalism, he has won a number of state, national, and international awards for his writing and photography including best newspaper design by the Associated Press Managing Editors Group and the international iPhone photographer of the year by the iPhone Photography Awards. He most recently worked as editor of Community Impact Newspaper covering a number of Dallas-Ft. Worth communities on a hyperlocal level. Contact Kyle G. at kyle.horst@thefivestar.com.
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