Today, Ceres has released a major report on how US regulators should address financial climate risk. Sarah Bloom Raskin, Former US Deputy Secretary of the Treasury, ex- member of the Federal Reserve Board of Governors and a contributor to the report, says it provides “a gateway to an economy that is resilient and up to the task of handling the fast-unfolding effects of climate change.” Here, she speaks to RI.
What are the key takeaways from this report for global asset managers and asset owners?
If there is but one lesson learned from this pandemic, it is that preparation can reduce the impact of shocks: the most optimal way to address climate change is before catastrophe strikes. This report shows us that US financial regulators can get to work now to inoculate investors and markets from dramatic and painful adjustments to a low-carbon economy.
By addressing the worst-case scenarios regarding the market and economic effects of climate change, we can forestall reductions in the value of global financial assets, decreases in global output and lower per capita global GDP. We can allocate capital to businesses that are creating innovations that reduce an existential threat. The report calls on the various US financial regulators to use their existing mandates from Congress to start taking into account climate change’s impact on the financial system, and provides specific actions for each regulator to consider and implement.
The report makes climate risk recommendations for the US Federal Reserve, but last year, when asked about introducing climate risk into supervision during a Senate Committee meeting, Fed Chair Jay Powell, said: “I guess I see climate change as a longer-run issue. I don’t know that incorporating it into the day-to-day supervision of financial institutions would add much value. We have lots of things to supervise them for”. Is it likely that his view will change?
Chairman Powell and the Federal Reserve have their hands full at the moment dealing with the economic effects of the pandemic. But dealing with the pandemic and dealing with climate change are not an "either/or" or a "now versus later" proposition. They can be handled together. In fact, handling them together would enhance the strength of the US economy in coming back from the devastation of the pandemic more strongly, and positioning businesses and the economy to withstand the continued and more intense shocks from the climate. It reminds me of having a straw house that is blown down. Do you build it back with straw or do you try for something more durable? You can both rebuild it and make it stronger.
On the issue of the risks of climate events, the Federal Reserve has become an international outlier. The Federal Reserve is one of the only central bank authorities in the developed world that is not a member of the Network for Greening the Financial System [NGFS]. The NGFS was established in late 2017, and its members include the Bank of England, the Bank of Canada, the Bank of Japan, the Swiss National Bank, the European Central Bank, and many others. The Federal Reserve’s absence from such an important international network is keeping it from joining the leading thinkers on how to address the financial and economic risks of climate change.
However, there are some positive signs that the Federal Reserve is beginning to recognise both the importance of climate change and its impact on the financial system. My guess is that the Federal Reserve will come to realise that it makes economic sense to be prepared.
US President Donald Trump has withdrawn from the Paris Accord, saying it undermines the US economy. As the US Administration takes this position on climate change, what impetus do US regulators have to follow the recommendations in the report?
The US Administration's withdrawal from the Paris Accord was scientifically ignorant and economically illiterate. Belying the idea that the Paris Accord undermined the US economy, many of the US’s largest companies and investors worldwide advocated for remaining in the Accord: Exxon, Apple, Google, Microsoft, Morgan Stanley, Chevron, and many others.
Fortunately for investors and the planet, most US financial regulators have been designed as independent agencies. The Federal Reserve, the FDIC, the FHFA, the CFTC and the SEC are independent agencies; the OCC is an independent bureau of the Treasury Department. Independence empowers them to act in the best interest of the common good, in both the short run and the long run. For example, this past October, Chairman Powell appropriately praised the Federal Reserve as “an independent central bank—a central bank able to make decisions in the long-term best interest of the economy, without regard to the political pressures of the moment”. This independence affords them the ability to look beyond the horizon of the moment to the risks that lie ahead.
Not only are these US entities independent, but they have statutory and explicit obligations set out by Congress. It is arguable that they were given independence by Congress precisely so they could monitor and address whatever risks emerge, and the leaders of these agencies can assert their independence without fear of losing their jobs.
The US Commodity Future Trading Commission already has a Climate-Related Market Risk Subcommittee. Would you say it is the most advanced US regulator on the issue of climate risk? Who is the least advanced US regulator on the issue of climate risk?
CFTC Commissioner Rostin Behnam deserves a lot of praise for his efforts in bringing attention to the grave risks that climate change poses to the financial system. There are other regulators that also deserve praise. For example, both Federal Reserve Governor Lael Brainard and SEC Commissioner Allison Herren Lee have publicly recognised the financial impact of climate change. But there is no mention of climate risks in the most recent reports of the Financial Stability Oversight Council, or in the supervisory and risk reports issued by the Federal Reserve, the FDIC and the OCC. Right now, it seems as if the CFTC is in first place among the regulators, since it has established a Climate-Related Market Risk Subcommittee that has members with significant climate finance expertise and is close to issuing a substantive report. The CFTC is on the cusp of creating momentum for the other agencies to move climate risks from the peripheries of their concerns where they think of the issues as political or social, rather than as issues of risk that fall squarely within the mandates of what their agencies were created to consider.
The report makes recommendations to the US Securities and Exchange Commission, including climate disclosure. However, SEC Commissioner Hester Pierce has recently said that existing securities disclosures requirements handle all types of material information, in response to a recommendation on ESG disclosure from an SEC committee. How likely is the SEC to take up this recommendation?
I don't know the timetable for the SEC to consider this recommendation. What I do know is that there is more than one view on the question of disclosures. For example, Commissioner Allison Herren Lee has argued that the SEC should mandate and standardise climate-related disclosures. This March, she told the Investment Adviser Association Compliance Conference: “Serving investors starts with listening to them, and investors have been clear about their need for climate risk disclosure.” Private-sector investors have also argued about the need for climate-related disclosures. The Task Force on Climate-related Financial Disclosures has more than 1,000 member organisations with a combined market capitalization of over $12trn. Climate-related disclosures make sense from the perspective of providing investors with information they need to allocate capital to innovative firms and projects that are devising ways of mitigating the risk of climate change impacts and providing our economy with what it needs to transition to an economy strong enough to deal with what lies ahead.
You have said previously that the new Main Street Lending Programme should not direct money to the “carbon economy”. However, in a time of economic crisis, stimulus packages are necessary. What do you suggest the Fed should do to prop up the US economy, but also make sure it isn’t propping up fossil fuel companies?
The Fed can be doing both at the same time: it can be propping up the US economy at the same time that it positions firms to accelerate their progress on climate change. In fact, were it to do both, we would see a stronger recovery from this crisis and be in a better position to withstand the next one.
But don't take it from me alone – in the midst of the economic response to the COVID-19 crisis, the Oxford Smith School of Enterprise and the Environment surveyed 231 central bank and finance ministry officials, as well as other economic experts, on COVID-19 stimulus packages and their impact on climate change. The survey found that the best long-term recovery plans will also be the plans that reduce greenhouse gas emissions.
The survey goes on to suggest methods in which both necessary stimulus is provided and progress is accelerated on addressing climate change. So there are several different methods that the Fed and other central banks could be considering. The point is that the Fed could be including in its qualifying standards objective criteria that will select for firms that will provide the greatest return on the public's investment. Or it could include the requirement that firms describe their plans for transitioning towards a lower-carbon footprint. There are many ways that it and others can act.