US regulator calls climate change a systemic risk

US regulator calls climate change a systemic risk

Climate change poses a “slow motion” systemic threat to the stability of the US financial system, requiring immediate action from financial regulators, including the Federal Reserve and the Securities Exchange Commission.
This is one of the findings of a landmark report commissioned by the US Commodity Futures Trading Commission and put together by a panel convened nearly 10 months ago by Rostin Behnam, one of two Democrats on the five-member CFTC.
The report was approved on Tuesday by 35 members of the panel, including representatives from Goldman Sachs Group Inc., BP PLC, Dairy Farmers of America and The Nature Conservancy.
The 196-page report stated, “The physical effects of climate change are already affecting the United States, and the transition to net-zero emissions can also affect many sectors of the economy,”.
“Both physical and transition risks can give rise to systemic and sub-systemic financial shocks, potentially leading to unprecedented disruption of the proper functioning of financial markets and institutions.”
The report notes that a sudden change in risk perception from frequent wildfires and intense storms can lead to a sudden drop in asset prices, which spread more widely in the cascades and markets through a community.
And because the Kovid-19 epidemic has eroded household wealth, government budgets, and business balance sheets, the economy is more vulnerable than before, it added, “increasing the likelihood of an overall shock with systemic implications.”
The release of the report comes less than two months before a national election against Republican challenger Joe Biden, an “existential threat”, to Republican President Donald Trump, who says climate change is a hoax.
Its first recommendation is to “establish a price on carbon” which is sufficient to drive businesses and markets to cut the use of carbon dioxide-producing fuels such as oil and gas. Congress would need to take action by imposing a tax on carbon.
But the report’s dozens of other recommendations amount to a call for a comprehensive rewrite of financial market rules and norms that can proceed without new laws and whoever wins the presidency.
Among the proposals: Banks need to emphasize testing community banks to disclose climate-related financial risks and emissions to listed companies, and their resilience to climate change.
Regulators in Europe have worked for years on efforts to investigate and mitigate climate risks to financial markets.
Regulators in the United States, where politicians regularly doubt the fact that burning of fossil fuels are affecting the Earth’s climate, have lagged far behind in such work.
Only recently has the Federal Reserve begun to accept the ability to destabilize the financial system and think of possible responses to climate change.
The report urges financial authorities to integrate climate risk “into their balance sheet management and asset purchases, particularly related to corporate and municipal debt.”
It also calls for them to research into the financial impacts of climate change and to join international climate-focused groups, such as the Network for Greening Financial System, all specifically applicable to the Fed.

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