U.S. CFTC report a start toward managing climate risk in financial system

13 Sep, 2020 06:14
source: Singularity Financial

Singularity Financial Hong Kong September 13, 2020 – The Commodity Futures Trading Commission’s Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee (MRAC) released a report entitled Managing Climate Risk in the U.S. Financial System.  The Climate Subcommittee voted unanimously 34-0 to adopt the report.

Managing Climate Risk in the U.S. Financial System is the first of-its-kind effort from a U.S. government entity. Commissioner Behnam initiated this effort to examine climate-related impacts on the financial system in June 2019 when the MRAC convened to examine climate change-related financial risks. At that meeting, Behnam pointed to the critical importance of undertaking this effort, highlighting ongoing work by private market participants and government entities across the globe, including more than 40 central banks and supervisors like the European Central Bank, the World Bank, and the People’s Bank of China.

“With this report in hand, policymakers, regulators, and stakeholders can begin the process of taking thoughtful and intentional steps toward building a climate-resilient financial system that prepares our country for the decades to come,” CFTC Commissioner Rostin Behnam said in announcing the report.

“I think this report … really pushes the ball forward, so that when we do take action, we have something to look at. We have a report that shines light on the issues, the risks, and what needs to get done.” Behnam added. “This is not a regulator problem. This is not a private-sector problem. This is a global problem. We have to do it together. We have to do it thoughtfully. We have to recognize the risks that are out there, and we have to take one step at a time. That’s the only way it’s going to get done. We need everyone’s hands on deck here to push the conversation forward.”

Bringing further urgency to the issue, the report noted, the coronavirus pandemic will likely prolong “fiscal deterioration, stressed business balance sheets, and depleted household wealth. In this context of heightened financial fragility, managing climate-related risk becomes even more important and urgent.”

In its simplest form, the report describes two types of risks associated with climate change: physical and transition risk.

Physical risks are things like impact on infrastructure, human health, and agricultural productivity, as well as the impact on economic activity, asset valuations, and firms. Transition risks, on the other hand, “are associated with the uncertain financial impacts that could result from a transition to a net-zero emissions economy,” like suddenly stranded assets in the fossil fuel industry or shifts in climate policy, technology, or consumer preferences.

The nearly 200-page report, describes with great care both the specific physical and transitional risks, as well as the extensive scale of the challenges. It also provides 53 concrete recommendations to mitigate those risks.

It concludes that:

1) Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy;

2) Climate risks may also exacerbate financial system vulnerability that have little to do with climate change; including vulnerabilities caused by a pandemic that has stressed balance sheets, strained government budgets, and depleted household wealth;

3) U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks;

4) Existing statutes already provide U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now;

5) Regulators can help promote the role of financial markets as providers of solutions to climate-related risks; and

6) Financial innovation is required not only to efficiently manage climate risk but also to facilitate the flow of capital to help accelerate the net-zero transition and increase economic opportunity.