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Top US financial regulators outline plan to tackle climate-related financial risks

·2 min read

A coalition of the nation’s leading financial regulators on Thursday outlined first steps in monitoring and supervising climate-related financial risks, as the Biden administration continues to craft its environmental policies.

The Financial Stability Oversight Council, led by Treasury Secretary Janet Yellen, released a 133-page report detailing several recommendations on how to avoid financial disintermediation that could result from extreme weather and climate-related events.

The report makes four broad recommendations: increasing the regulatory resources dedicated to assessing climate risks, collecting new data to better assess those risks, enhancing public climate-related disclosures, and conducting “scenario analysis” to examine possible future risks.

The FSOC, which includes eight federal regulators and three state regulators among its members, is opening the door to debate on how the private sector and the government should be assessing — and mitigating — the financial implications of disruptive events like hurricanes and wildfires.

“We already know that climate change has already started causing an array of economic harms, and failure to address climate-related financial risks will only allow them to grow larger,” Yellen said Thursday.

Yellen noted that serious financial risks are not only tied to the disasters themselves, but the transition to a net-zero economy. The former Federal Reserve chair added that other “smart government policies” will be needed from the White House to facilitate such a transition.

The report is being released ahead of the United Nations Climate Change Conference kicking off Oct. 31.

It is unclear how compulsory the report’s recommendations are, but Treasury officials said broad council-wide support of the report shows the regulators will be a strong guide for each agency’s work on these matters

The recommendations include specific measures the FSOC and its members should be able to do soon, such as creating a climate-related Financial Risk Committee (CFRC) that will coordinate policy work across the regulators.

Other recommendations may require rulemaking, a process that could involve public comment. The report advises FSOC members to “use existing authorities” to collect data that could help regulators fill gaps in climate-related risks in the private sector.

Corporate disclosures on financial risks are likely to be a recommendation more specific to the Securities and Exchange Commission, where Chair Gary Gensler has already expressed interest in expanding reporting.

At the Federal Reserve (the primary regulator of the nation’s largest banks), existing work on scenario analysis is likely to get a boost. Such a tool would use different hypothetical climate scenarios to look at the long-run impact of climate events on a range of financial markets.

“We’ll share our progress and look forward to coordinating with our FSOC colleagues in meeting the critical challenges outlined in the report,” Fed Chairman Jerome Powell said Thursday.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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