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US Fed announces second climate committee as Chile mulls ESG disclosures by listed firms

Moves come as US Treasury says it will work with financial regulators on climate risk

The Federal Reserve yesterday announced a Financial Stability Climate Committee (FSCC) in the latest sign that the US central bank is moving fast to establish a framework to address climate change risk holistically across its operations.

It comes just weeks after the Fed created the Supervision Climate Committee to assess climate-related risks that need to be addressed in its supervision of financial organisations.

The FSCC will assess climate-related risks across the financial system, considering the complex interactions that can take place.

In a speech, Fed Governor Lael Brainard said: “Given the implications of climate change for both individual financial institutions and the financial sector as a whole, we need a framework that incorporates both microprudential [related to financial supervision] and macroprudential [related to financial stability] considerations.”

She said that microprudential and macroprudential objectives were often aligned on issues such as consistent climate-related disclosure that helped both financial firms manage climate risks and supported financial stability by helping the market price climate risk. 

“Given the importance of consistent, comparable, and reliable disclosures to financial stability and prudential objectives, mandatory disclosures are ultimately likely to be important.”
This is the second time that Brainard has hinted that mandatory disclosure on climate is in the Fed’s purview, and comes as today the UK government launches a formal consultation on mandatory climate disclosure of large organisations.

Brainard added, however, that there were situations where microprudential and macroprudential goals did not align on climate – for example, where organisations individually acting on climate risk will not reduce risk from the financial system as a whole.

Brainard said the Fed will be investing in research, data and modelling on climate change, and that it would be exploring scenario analysis.

Brainard said the new FSCC will coordinate with the US Department of Treasury’s Financial Stability Oversight Council (FSOC).

US Treasury Secretary Janet Yellen reportedly told the House Financial Services Committee yesterday: “I believe that FSOC can play a role in arranging discussions among financial regulators, some of whom have responsibilities for assessing risks from climate change to the financial institutions that they supervise and regulate to coordinate a system-wide response using the best available tools.”

The FSOC includes important US financial regulators such as the Fed, Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission.

Yellen added: “I think FSOC can facilitate identification of data and information, including high-quality financial disclosures that are needed to understand climate risks, and make sure that climate risks are addressed fully in light of these assessments."

The Fed has also stepped up internationally on the issue, joining the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) late last year and co-chairing the Basel Committee on Banking Supervision's Task Force on Climate-Related Financial Risks (TFCR). 

Seperately, Chile’s financial regulator is mulling the introduction of mandatory ESG reporting for listed companies to help investors “identify, quantify and manage ESG risks”.

According to draft proposals which have been published by the Commission for the Financial Market (CMF), Chilean companies will be asked to to include “comprehensive” ESG and corporate governance-related disclosures within their annual reports.

The enhanced disclosure requirements are intended to provide information on a company’s strategy, and how it identifies and manages material risks. CMF said the final rule will take into account both investors’ need for better disclosures and any additional compliance costs which will be borne by reporting companies.

The proposals are now open for public feedback until April 16 and CMF has indicated it will conduct additional targeted consultations among stakeholders.

RI first reported that CMF was considering mandatory ESG reporting in 2019, ahead of Chile hosting COP25. At the time, CMF President Joaquín Cortez Huerta said the proposed changes would help investors assess companies’ impacts on natural ecosystems – based on corporate initiatives, investments and goals related to the consumption and production of resources.