September 17, 2020
Authored by: R. Randall Wang and Vicki Westerhaus
Includes recommendations for action by SEC and other financial regulators
Last week, a subcommittee of the Commodity Futures Trading Commission issued a sweeping report addressing climate change risks, concluding that they pose both major systemic and sector/regional-level risks to the stability of the U.S. financial system and its ability to sustain the American economy. Further, it concludes that such risks are increasing rapidly, economic incentives are misdirected and immediate action across the global financial system is required.
The report is wide-ranging with a number of specific, detailed recommendations. Its length and complexity make it impractical to summarize for this blog, but fortunately, the report does include a well-organized executive summary (beginning on page i).
Some of the report’s key points include:
- The United States should establish a price on carbon. A fair, economy-wide carbon pricing regime is necessary to fix a fundamental market flaw in the economic system to ensure that appropriate incentives are in place for the efficient allocation of capital
- U.S. regulators should use their broad, flexible authority to start addressing the risks now
- Research arms of federal financial regulators should study the financial implications of climate-related risks, including the potential for and implications of climate-related “sub-systemic” shocks to financial markets and institutions in particular sectors and regions of the United States (e.g., agricultural and community banks and financial institutions serving low-to-moderate income or marginalized communities)
- Financial regulators, in coordination with the private sector, should work together to rapidly improve the quality of data, analytics