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Facing pressure from congressional Democrats and a need to deliver on President Biden’s campaign promises, Treasury Secretary
Janet Yellen
Her watchdog is instructing financial regulators to take steps towards reducing climate change-related risks.
These regulators have always worked to ensure that banks remain sound, markets stay competitive, and investors receive fair and accurate information. Ms. Yellen has now asked agencies like the Federal Reserve and Securities and Exchange Commission for their responses to her claims. urgent threat posed by climate change to the economy and financial assets, such as a portfolio of mortgages in low-lying coastal areas or an insurance company’s backing of drought-sensitive farm land.
She is on a tightrope. Many Republicans and industry advocates say financial regulators shouldn’t have their hands deep in environmental policy. Progressive Democrats want bold, fast action. Ms. Yellen has aimed at addressing climate issues at the top of regulators’ agendaWhile lobbying for the private sector and pushing for similar legislation,
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“We’re not an environmental agency,” Ms. Yellen said in an interview with The Wall Street Journal on the Treasury Department’ roleClimate issues. “But we can play and are trying to play a very significant role in contributing to our country and the globe in addressing this.”
Now the agencies Ms. Yellen convenes as chairwoman of the Financial Stability Oversight Council, or FSOC—a coalition of regulators established following the 2007-09 recession—are taking their first steps.
Louisiana homes were flooded by Hurricane Ida on August 25th. This is an example of the damage that climate change could cause to financial institutions that have mortgages on property that has been damaged.
Photo:
David J. Phillip/Associated Press
The Treasury’s Office of the Comptroller of the Currency will soon issue a framework of its expectations regarding how large banks should manage climate risk. Further guidance will be issued next year. The Fed is currently conducting scenario analysis to assess financial risks related to climate change. The SEC intends to issue a rule proposal early next year To strengthen mandatory disclosures around climate-related risksHe has written letters to dozens public companies asking them to provide more information to investorsLearn how climate change could affect earnings.
The FSOC has released a general approach to the problem. a reportIn October, the group officially designated climate change as an emerging and growing threat to U.S. financial stability. This opened up the possibility for more regulatory action.
The actions signal the financial industry can expect a heavier compliance burden and more oversight from Washington tied to the administration’s environmental concerns. The regulatory push is being scrutinized by the finance industry and other political corners.
“I acknowledge that global warming is real. However, it does not follow from this that there is a new systemic risk to the financial system,”
Sen. Pat Toomey
(R., Pa.), was the Senate Banking Committee’s ranking member. This was during an October congressional hearing. “We have had severe weather events since the dawn of time.”
Fossil-fuel companies remain among the world’s most valuable and widely traded companies, and Mr. Toomey said he thought financial regulators were seeking ultimately to starve them of capital.
Emissions flow from a factory in Reserve, La., part of the industrial backdrop in the U.S. for President Biden’s goals to cut greenhouse-gas emissions.
Photo:
emily Kask/Agence France Presse/Getty Images
Meanwhile, the Biden administration is under pressure from progressives to do more to deliver on Mr. Biden’s promises ahead of next year’s midterm elections. During his presidential campaignBiden stated that the United States should be an international leader in climate policy and set goals to reduce greenhouse gas emissions, encourage investment and efficiency in renewable energy, and reduce dependence on fossil fuels.
Pressure on regulators to act has risen because other aspects of the White House’s climate agenda remain mired in the president’s $2 trillion social-spending package, which hasn’t passed Congress, and some have been stripped out of that bill entirely.
Legislators with progressive leaning balked at Mr. Biden’s renominationThis is
Jerome Powell
for Federal Reserve chairman on the grounds that the institution isn’t doing enough to address climate-related risks.
Hurricanes, droughts, and other weather events tied to climate change “are destroying homes, roads and bridges, and other physical and financial assets,” Sens. Sheldon Whitehouse, D., R.I.
Jeff Merkley
(D., Ore.), said in a statement last week. “The economic losses…are likely to be greater in total than those experienced in the housing crisis and Great Recession.”
When Mr. Biden said he would renominate the Fed chairman, he said Mr. Powell made clear that a “top priority will be to accelerate the Fed’s effort to address and mitigate the risk that climate change poses to our financial system and economy.”
Ms. Yellen is, in the meantime, a long-standing believer in the potential risks of climate change,She refers to them as twofold.
First, there are the physical risks posed by more-extreme weather and more frequent disasters that can affect the clients and communities that financial institutions serve. For example, a lender could be facing increasing losses from mortgages covering homes more susceptible to destruction by floods and wildfires.
To be sure, a recent New York Fed study found that weather disasters had minimal effects on U.S. banks’ performance over the past quarter-century, in part because local knowledge likely helped them avoid lending in vulnerable areas.
But there are also transition risks stemming from government or societal efforts to wean the economy off fossil fuels. For example, a bank heavily invested in industries that emit greenhouse gasses theoretically could see a decline in the value of those assets if society increasingly embraces different energy sources.
Ms.Yellen said the regulators eventually could implement measures including requirements that banks hold capital as a buffer against climate risks, an idea the banking industry opposes.
“The regulators, under their safety and soundness mandates, will have to decide whether the risks are being appropriately managed by these institutions,” Ms. Yellen said. “Conceivably, they might decide that greater capital is required to manage risks in particular sectors,” she said.
Alex Martin, a senior policy analyst at Americans for Financial Reform, said the FSOC report missed an opportunity because it didn’t offer more suggestions on how regulators can mitigate climate risks, rather than analyze them.
“FSOC has the ability to help us tackle this if the chair will lead it in a bold way,” Mr. Martin said.
Bank-lobbying groups said the FSOC report took a reasonable approach. Still, they are watching the regulators’ moves for signs of more aggressive action, such as enacting climate-related capital requirements.
“There are very significant and definite concerns with trying to embed climate-change-type risks,” into capital requirements, said Sean Campbell, chief economist at the Financial Services Forum, an advocacy organization representing large banks. Mr. Campbell said such requirements would face a “square peg, round-hole problem,” because capital requirements are meant to buffer against short-term, unpredictable losses and not long-term issues such as climate change.
The decadeslong time horizon of climate change injects uncertainty into estimating potential effects, posing a challenge to regulators.
Others say the push into climate issues is overreach.
Jay Clayton,
who led the SEC during former President
administration, said that financial agencies have clearly defined authorities. He stated that Congress should decide on issues that go beyond these remits.
“To the extent that they continue to go fairly far afield of their original purpose,” Mr. Clayton said, “that’s going to cause a lot of problems.”
Ms. Yellen disagrees and stated that regulators had a responsibility for identifying risks and ensuring the financial system was ready. But there are limits, she said: The regulators “don’t have the legal mandates to simply tell lenders, ‘You shouldn’t make these loans to, say, energy companies because it harms the environment.’ ”
Write to Amara Omeokwe at [email protected]Paul Kiernan and [email protected]
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