WASHINGTON — Democrats and Republicans in the Senate are at odds over the role financial regulators can play role in mitigating the impact of climate change on financial system and the broader economy.
At a Senate Banking Committee hearing on Thursday titled “Protecting the Financial System from Risks Associated with Climate,” Democrats advocated for financial regulators to play a more active role in protecting banks and other firms from losses tied to extreme weather events, while Republicans said regulators have no business weighing in on such matters.
“We know that climate change threatens the country’s financial stability,” said Senate Banking Committee Chairman Sherrod Brown, D-Ohio. “And the financial sector, and the government agencies that oversee it, are going to have to reckon with the consequences of decades of risky investments in industries that fuel natural disasters, and threaten people’s paychecks and their retirement security.”
Sen. Pat Toomey of Pennsylvania, the top Republican on the committee, disagreed, saying climate policy "is beyond the scope" of regulators' authority.
“Just as we wouldn’t task the [Environmental Protection Agency] with auditing corporate books, financial regulation and supervision isn’t meant for advancing environmental policy,” Toomey said.
The debate comes as the Biden administration attempts to use the nation's regulatory apparatus to force corporations to take stock of activities, such as financing oil exploration, that could be contributing to global warming.
On Wednesday, the acting chairman of the Commodity Futures Trading Commission, Rostin Behnam, announced that the agency is establishing a climate risk unit to examine the role of financial derivatives in “addressing climate-related risk and transitioning to a low-carbon economy.” And the acting chair of the Securities and Exchange Commission, Allison Herren Lee, said Monday that “no single issue has been more pressing” for the agency than ensuring it is engaged in confronting the impact of climate change on investors.
At her confirmation hearing in January,
Toomey, however, said that financial regulators' failure to anticipate a global pandemic's impact on the economy suggest that they aren't capable of such oversight.
“The far-reaching post-crisis financial regulatory framework that was imposed on financial institutions completely failed to consider the possibility of a global pandemic disrupting the financial system,” Toomey said. “Do you think the financial regulators would correctly anticipate the way that climate change would affect different regions of the country in the course of the next three or four or five years?”
Republicans have also argued that financial regulators will try to cut off politically disfavored businesses, such as the oil and gas industry, from financial services, if they focus on issues like climate change. They fear that regulators will implement a policy similar to Operation Choke Point, in which the Obama administration investigated banks that did business with firms that were disfavored by the administration, such as firearms firms and payday lenders. More than half of the Republicans on the committee have backed
“I am concerned that what is really under discussion today is really not an effort to protect the financial system from climate risks, but rather to establish conditions by which certain businesses deemed politically unfavorable can be starved of capital and shut out of the financial system,” said Sen. Steve Daines, R-Mont., a co-sponsor of the Fair Access to Banking Act.
Democrats countered that it is well within financial regulators’ authority to weigh the risks of climate change on the financial system. They have proposed legislation directing the SEC to require companies to disclose their investments in fossil fuel companies and other activities that could contribute to climate change. Senators have also introduced legislation requiring the Fed to establish
Gregg Gelzinis, associate director for economic policy at the Center for American Progress, told senators that a warming planet could have dire implications for financial firms.
“The physical effects of climate change could devalue a range of real assets and financial assets, including commercial and residential real estate, corporate bonds and loans in certain sectors and geographies, municipal debt, commodities, and the derivatives tied to those instruments,” Gelzinis said.
Sen. Elizabeth Warren, D-Mass., agreed, and said it is in regulators' purview to consider the impact of climate change on financial institutions’ overall health.
“Because the Fed’s mandate includes the safety and soundness of the too big to fail banks it is within the Fed’s responsibility to deal with climate risk,” Warren said.
Democrats also argued that that climate disclosures are necessary to protect investors. Virginia Sen. Mark Warner cited a Government Accountability Office study that found that 12 out of 14 institutional investors want more information on companies' climate exposure so that they can better assess long-term financial performance.
“BlackRock came out last night saying they think we ought to have mandatory financial reporting on environmental risk,” Warner said, referring to the New York money manager. “So while I know some of the members of the panel may want to dismiss this science, or somehow say that it is simply being promoted by political interests, I actually call BlackRock and 12 out of the 14 institutional investor groups of the GAO study examples of where the market is demanding this information.”
