WASHINGTON — Climate risk could take center stage in financial regulation under Janet Yellen, President-elect Joe Biden’s nominee for Treasury secretary, as activists and investors are looking for the incoming administration to move decisively on global warming.
Biden made climate change a key part of his policy platform during his campaign, but is already facing pressure to go further than his stated goals of rejoining the Paris Agreement and reaching net-zero emissions by 2050. And some have predicted that Yellen atop Treasury could elevate the issue for banks.
“We definitely want to see her as Treasury secretary and other financial regulators show strong leadership in using every lever at their disposal to tackle climate change and to help protect the economy and the country in their role,” said Ben Cushing, senior campaign representative with the Sierra Club’s financial advocacy campaign.
That could include agenda items like requiring banks and financial institutions to disclose their impact on the climate, launching climate-related stress tests and imposing higher capital requirements or portfolio limits on fossil fuel financing, experts say.
Climate advocates applauded Yellen’s nomination, given her support for imposing a tax on carbon and her position with the G-30’s working group dedicated to climate change and finance, and believe she could be key to bringing the United States on par with other countries’ efforts to mitigate climate risk.
“Many of our banks today and insurance companies today, those that are operating internationally, they follow the rules in Europe that are further ahead of us, so we know that they can move further if they have the direction and guidance from our regulators,” said Steve Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, a nonprofit focused on corporate sustainability.
Some are anticipating that the U.S. could follow the likes of the Bank of England and the Banque de France in requiring companies to file disclosures on their exposure to climate risk. While some U.S. banks like JPMorgan Chase
The potential of regulators establishing a climate risk disclosure regime has gained attention among banks and the American Bankers Association, said Joseph Pigg, the group’s senior vice president of fair and responsible banking.
“That's in part because disclosure regimes are already being demanded by investors and customers and others,” he said. “Already those expectations have increased pretty dramatically in the last few years.”
Still, Cushing said he believes the Biden administration could go beyond mandatory climate disclosures.
“More disclosure is good, but disclosure in and of itself does not lead to change in the market and actions to mitigate risk,” he said. “Regulators need to actually regulate. We can't just require more disclosure, cross our fingers and wait.”
The basis for climate-based regulation could start with the Financial Stability Oversight Council, a group established after the 2008 financial crisis to identify systemic risks to the economy. It is chaired by the Treasury secretary and comprised of the heads of the major financial regulators.
“We hope that [FSOC] regularly and routinely raises climate issues,” said Rothstein. “We hope that our Treasury, the FSOC and the federal regulators have a unified message on that front.”
Cushing called on Yellen to convene the oversight council “immediately” once confirmed.
“The Treasury secretary leads FSOC, which really exists to identify and manage emerging systemic risks, which climate change absolutely is, and is one of the, if not the, greatest emerging systemic risks that we have,” he said.
While it remains to be seen what a Yellen-led FSOC might do on climate risk, several of the financial agencies that sit on the council have already moved toward addressing climate change under the Trump administration, which could lay the groundwork for the incoming Biden administration.
Last month, the Federal Reserve for the first time in its semiannual financial stability report
And in September, the Commodity Futures Trading Commission
“Climate has been identified even by existing financial regulators here in the U.S. as a systemic risk issue, so I think there's already been a nod,” said Lauren Compere, the managing director of Boston Common Asset Management. “Now, we need to take that and make sure that things like climate stress testing are incorporated into financial oversight.”
Banks are already anticipating executive action on climate at the Treasury level under Yellen and the Biden administration, said Pigg.
“It's not like this is going to hit anybody out of the blue,” he said. “What is going to be important is that as regulators start to look at things, that they don't go down a path that's drastically different than the infrastructure that's been put in place to meet investor and customer demands.”
Still, any moves to require banks to account for the risk of climate change could get pushback from Republicans. Some in the GOP have warned regulators not to impose measures that would discourage banks from doing business with fossil fuel companies.
A group of 47 congressional Republicans sent a letter Dec. 9 to Fed Chair Jerome Powell and Vice Chair for Supervision Randal Quarles expressing concern about the possibility that the central bank could include climate change scenarios in its supervisory stress tests.
"Introducing" such "scenarios into stress tests could accelerate the ill-advised pattern of ‘de-banking’ legally operating businesses in industries, such as coal and oil and gas, that are politically unpopular to certain vocal policymakers,” read the letter, which was signed by prominent Republicans on the House Financial Services Committee, including Reps. Andy Barr of Kentucky and Blaine Luetkemeyer of Missouri.
The dynamics in Congress are partly why climate advocates are pushing so strongly for Yellen and the incoming Biden administration to enact policies on their own instead of waiting for lawmakers to pass legislation, said Cushing.
“A key thing that we want to convey is that a lot of the authority to tackle climate change in financial regulation already exists, and that through Dodd-Frank and other existing authority that the Biden administration doesn't need to wait for new legislation in order to take executive action and use existing authority,” he said.
Rothstein agreed.
“While we're hoping that there will be bold legislative work, in the meantime, there is more than enough for President-elect Biden and his administration to do through executive orders, appointing key people to regulatory positions and having those regulators act in an expeditious manner,” he said.
Sen. Dianne Feinstein, D-Calif., introduced a bill on Thursday that would establish a permanent committee of climate experts on the FSOC, require financial regulators to update supervisory guidance to include climate risk, and require the council to determine how it will incorporate climate risk in decisions to designate risky nonbanks.
“We must act now to dramatically reduce carbon emissions, but we most also guard against the financial strain that we’re seeing because of climate change,” Feinstein said in a press release. “And that means ensuring that federal financial regulators have expertise in climate financial risk and develop an approach to mitigate that risk.”
Although it’s “inevitable” that incorporating climate risk into banking policy could be subject to some grumbling on Wall Street, global attitudes on those actions are quickly evolving, Compere said.
“If you look at things like climate stress testing, it's a concept maybe five years ago was just kind of in its infancy," she said. "But this is now something that has been incorporated in other types of financial oversight and it's a core agenda of the Bank of England or Banque de France.”
