US regulators urged to mandate climate risk disclosure and bring in stress testing

Ceres publishes sweeping report on climate change and regulation

US financial regulators have been called on to introduce mandatory climate risk disclosure and climate stress testing in a new report informed by financial heavyweights such as Mark Carney, Mary Schapiro, Dave Jones and former Federal Reserve Board Governor, Sarah Bloom Raskin, who was interviewed by RI today

It follows the International Monetary Fund (IMF) and Governor of the Reserve Bank of New Zealand both adding to the growing call for mandatory climate disclosures on Friday. 

The new report, Addressing Climate as a Systemic Risk: A call to action for US financial regulators, was released today by US investor body Ceres and examines the threat of climate change to financial stability, and the required regulatory response.

The US is considered to be far behind its counterparts in China, Europe, the UK, South America and Canada when it comes to regulating climate risk, and has it is estimated that it has already sustained nearly $1.8trn in costs from more than 265 climate-related extreme weather events since 1980; and more than $500bn in economic losses between 2015 and 2019, says Ceres.

“The Covid-19 pandemic has revealed just how vulnerable our interdependent and multi-layered financial market is to the impacts of sudden and disruptive events,” said Steven Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets. “Stresses and failures can have cascading impacts across the system… This report makes clear that it is the job of US financial regulators to protect capital markets from the impacts of the climate crisis, and provides a carefully curated set of recommended actions for doing that job and doing it well.”

The report is directed at the Federal Reserve Bank (Fed), the Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp., (FDIC), the Financial Stability Oversight Council (FSOC), the Commodity Futures Trading Commission (CFTC), the Federal Housing Finance Agency (FHFA) and federal and state insurance regulators.

The recommendations made in the reports include researching how climate change impacts financial markets, bringing climate risk into the supervision of financial institutions, introducing mandatory disclosure on climate risks, and coordinating between financial regulatory bodies. The report also recommends that US regulators join the Network for Greening the Financial System. 

The report urges the Fed to consider the climate-related impacts of its new stimulus programme – a response to Covid-19 and the associated economic crisis – saying the Fed’s Main Street Lending Programme makes it easier for oil companies to qualify for loans, and proposing that climate risk-management conditions should be imposed for companies seeking financial support – a move already made by the Canadian Government, and mulled by the Bank of England.