New Year’s Resolution for US Financial Regulators: It is well past time to act on climate

California’s former Insurance Commissioner urges regulators to look across the pond for inspiration

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Responsible Resolutions: This is the latest article in a series from sustainable finance practitioners about their hopes for 2020. Dave Jones calls for US financial regulators to take a tougher line on climate risk assessment and disclosure.

My 2020 New Year’s Resolution is that financial regulators in the US should follow the lead of other financial regulators and undertake climate risk stress testing and scenario analysis of the firms they regulate in the financial sector. Disclosure of climate risks in their mainstream financial reports by companies in the real economy and those in the financial sector should be mandatory.

The Task Force on Climate-related Financial Disclosures issued its report and recommendations in June 2017.  It is well past time for US financial regulators to act. Rising global temperatures are contributing to more severe and frequent catastrophic weather-related events – wildfires, river flooding, coastal flooding, hurricanes, drought, urban heat islands etc. These events are causing death, destruction and financial losses, which in turn pose risks to financial firms and investors.    

"Financial regulators in the US cannot afford to wait to see if governments will take the necessary actions to reduce greenhouse gas emissions sufficiently, however. Their responsibilities to oversee firms in the financial sector in the face of climate risk requires that they take act now."

In addition to the growing physical risks of the climate crisis, there is also transition risk faced by investors and firms in the financial sector.  

Central banks and insurance regulators in other developed economies (e.g. the UK, France, and the Netherlands) have asked the firms they regulate to undertake climate-related stress testing or have announced that they will conduct stress testing themselves. 25 insurance regulators have joined the Sustainable Insurance Forum, a network of insurance regulators founded in 2017 to develop best supervisory practices to address climate risk.

Over 50 central banks have joined the Network for Greening the Financial System (NGFS) to develop macro and micro prudential supervisory practices to address climate risk. Sadly, so far, the Federal Reserve System of the US has not joined.

While financial regulators in the US are not keeping up with their colleagues overseas in addressing climate risk, there has been some progress. Both California and Washington State’s insurance regulators were among the founding members of the Sustainable Insurance Forum. 

In 2018, as California’s Insurance Commissioner, I directed the Department of Insurance to undertake climate risk scenario analysis of the 600 largest US insurance companies’ investment portfolios using the PACTA model. We publicly released a sector-wide report which found that insurers’ investments in coal, oil and the automotive industries were misaligned with the economy necessary to keep global temperature rise below 1.5°C. And in January 2019 we undertook a second iteration of climate risk scenario analysis which also incorporated an analysis of physical risks to insurance company investment portfolios.   

There was another important development in 2019. Led by Superintendent Linda Lacewell, the New York Department of Financial Services, which regulates both banks and insurers, joined the Sustainable Insurance Forum (SIF) and became the first bank regulator in the US to join the NGFS. 

Also in 2019, the Federal Reserve Bank of San Francisco issued a call for research papers on the impact of climate change on the economy and hosted a conference in October 2019 at which the papers were considered.

Federal Reserve System Board Governor Lael Brainard, in published remarks delivered at the conference said:

"To fulfill our core responsibilities, it will be important for the Federal Reserve to study the implications of climate change for the economy and the financial system and to adapt our work accordingly. Congress has assigned the Federal Reserve specific responsibilities in monetary policy, financial stability, financial regulation and supervision, community and consumer affairs, and payments. Climate risks may touch each of these."

And most importantly, the US Commodity and Futures Trading Commission (CFTC), with the leadership of Commissioner Ross Behnam, established a Subcommittee on Climate Risk to prepare a report with recommendations on how the CFTC and other US financial regulators should address climate risks to the firms and markets they regulate. The report and recommendations are due by July 2020 and ideally should provide a roadmap for the CFTC and other US financial regulators to address climate risk.

As I write this, terrible fires are devastating Australia. So far over 14 million acres have burned, there have been at least 25 deaths, at least 1,300 homes destroyed, tremendous damage and destruction to Australia’s natural ecosystem, and the military have been mobilised to assist in evacuations of fire threatened communities. Like the 2018 wildfires in California, the Australian fires are so severe that they are creating their own weather, including strong winds and lightning.    

The physical impacts of climate change are already upon us and will only get worse in time if the nations of the world, including the US, do not take immediate and decisive action to reduce greenhouse gas emissions below the levels needed to prevent global warming of 2°C, whether it’s by setting a price on carbon or intervening more directly in the carbon economy or some combination thereof.

Financial regulators in the US cannot afford to wait to see if governments will take the necessary actions to reduce greenhouse gas emissions sufficiently, however. Their responsibilities to oversee firms in the financial sector in the face of climate risk requires that they take action now.  Moreover, even if greenhouse gas emissions are suddenly reduced, global temperatures have already risen with ongoing consequences for the climate and weather-related catastrophic events.    

In the US, 2020 should be the year when disclosure of climate risks is made mandatory, financial regulators undertake or require stress testing for finance sector firms under different climate scenarios, and they require or undertake climate risk scenario analysis of investment and loan portfolios.  


Dave Jones was California’s Insurance Commissioner from 2011-2019. He is a Senior Director at The Nature Conservancy and Director of the Climate Risk Initiative at the Center for Law, Energy and the Environment at UC Berkeley School of Law.