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Biden administration wants the financial sector to face up to climate risk

The Commodity Futures Trading Commission aims to create a new Climate Risk Unit, joining initiatives at Treasury, the Securities and Exchange Commission, and the Federal Reserve

Blue tarps cover the roofs of homes in Lake Charles, La., damaged after Hurricane Laura and Hurricane Delta landed in October. There were 22 extreme weather events in 2020 that cost taxpayers, businesses, investors and homeowners a combined $95 billion, according to the federal government. (Callaghan O'Hare for The Washington Post)

A growing number of federal regulators are pushing corporate America to reckon with the cost of climate change, arguing that global warming poses significant peril not only to the environment but also to the U.S. economy.

On Wednesday, Rostin Behnam, the acting chairman of the Commodity Futures Trading Commission, announced that he is establishing a Climate Risk Unit to focus on the role of complex financial derivatives in understanding and pricing climate-related hazards. That follows a request on Monday by the Securities and Exchange Commission for public input on how to require companies to disclose “consistent, comparable, and reliable information on climate change” risks to investors.

The moves come as President Biden’s administration is pledging to slash greenhouse gas emissions and following the U.S. record for billion-dollar weather and climate disasters set in 2020. There were 22 extreme weather events last year — ranging from tropical cyclones to drought — that cost taxpayers, businesses, investors and homeowners a combined $95 billion, according to the federal government.

In recent weeks, the Treasury Department and the Federal Reserve have highlighted the ballooning costs of extreme weather linked to climate change and also flagged the potential danger to businesses, banking and investments that could come from a rocky transition away from an economy rooted in fossil fuels.

“Climate change poses a major threat to U.S. financial stability, and I believe we must move urgently and assertively in utilizing our wide-ranging and flexible authorities to address emerging risks,” Behnam said in a statement to The Washington Post. He added that the agency’s “unique mission” and its attention to risk and prices “puts us on the front lines of this effort.”

The CFTC action — one of several taken across the Biden administration in less than two months — could shift investment decisions across the nation by signaling to markets that it is costlier to invest in fossil fuels and other projects that could exacerbate global warming. At the same time, these policies could make it easier to finance clean energy and other efforts aimed at addressing climate change.

Last fall, Behnam helped oversee a report issued unanimously by one of the commission’s advisory panels calling on all federal financial regulators to develop strategies for addressing climate risk with their existing authorities. Behnam and others think that if financial institutions don’t assess, monitor and manage climate risks, they could face debilitating losses or be unable to shift to a greener economy.

Treasury Secretary Janet Yellen — who in her confirmation hearings called climate change “an existential threat to not only our environment, but also our economy” — has established a new senior position for climate. And the Securities and Exchange Commission on Monday requested public input on how to revise disclosure rules to include “consistent, comparable, and reliable information on climate change.” The Federal Reserve is also examining climate risks.

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“No single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and [environment, social and governance issues] pose for investors, our financial system, and our economy,” SEC commissioner Allison Herren Lee said at the Center for American Progress on Monday.

Among the steps the agencies could take are altering the way oil companies calculate their carbon-rich reserves; changing how farmers count the carbon storage increased by improved tilling techniques; making sure cap-and-trade credits in California and the northeast’s Regional Greenhouse Gas Initiative are properly measured; and ensuring that bond or derivative funds don’t include funds from “green bonds” that aren’t green.

The moves are designed to make people comfortable enough to invest private capital at levels that could rival or exceed federal climate spending. Deputy White House national climate adviser Ali Zaidi, who helped write a 2016 report outlining the climate change risks faced by the federal government, said in an interview that the government can use its leverage to make climate risks more obvious.

‘’The market is ready to differentiate based on exposures to climate risk,” Zaidi said. “And so that’s another place where the president ran on it, and has a conviction that by getting more of that data out there in a consistent and comparable way, you get the market what it needs to be able to differentiate based on exposure to climate-related risks.”

There has been so much discussion about climate by financial regulators since Biden took office that it has “frankly been difficult to keep up with the steady stream of policy developments in this area,” said Jack Lienke, regulatory policy director at the NYU School of Law’s Institute for Policy Integrity.

“Requiring disclosure of potential climate harms is, to be sure, no substitute for seeking to prevent those harms through greenhouse gas reductions, or for taking steps to protect vulnerable communities from climate effects,” Lienke said. “But it can inform those necessary efforts.”

Some sectors, however, are likely to push against efforts by the agencies. The fossil fuel industry has often challenged federal efforts to evaluate companies based on sustainability criteria often known as Environmental, Social and Corporate Governance (ESG).

“Our industry is ready to engage with the Biden administration in continuing our private-sector efforts to drive progress on ESG issues,” said Aaron Padilla, manger of climate and ESG policy at the American Petroleum Institute. But he said that “any future regulatory actions must be workable for different industries, support access to capital for all sectors and allow for companies’ reporting to demonstrate the multiple pathways toward managing climate opportunities and risks, rather than a one-size-fits-all approach.”

The Trump administration issued two regulations aimed at blocking retirement plan advisers from weighing corporate environmental, social and governance factors when investing funds. On March 10, the Labor Department announced that it would not enforce the rules. Although it is not rescinding the rules at this point, the department said, it will “revisit” them.

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Republicans have also voiced concerns about requiring private companies to evaluate their operations’ climate effects and vulnerabilities. At a confirmation hearing this month for Gary Gensler, a former Goldman Sachs executive whom Biden has chosen to head the Securities and Exchange Commission, Sen. Patrick J. Toomey (R-Pa.) said that “the securities laws are not the appropriate vehicle to regulate climate change nor to correct racial injustice or intimidate companies regarding political spending.”

But Gensler, a former CFTC chairman, made it clear that he plans to make climate change a priority. “Increasingly, investors really want to see — tens of trillion of dollars in assets behind it — climate risk disclosure,” he said at the March 2 hearing.

Gensler told the senators that “issuers would benefit from such guidance. So I think through good economic analysis, working with the staff, putting out to the public to get public feedback, that is something the commission, if I’m confirmed, would work on.”

Nell Minow, vice chair of ValueEdge Advisors, an activist shareholder advisory firm, said “the SEC’s number one job” is to force companies to divulge to investors any information that is “material” or big enough to alter the course of the firms. “Every company really needs to up its game on this,” she said.

The Federal Reserve has also shown an increased willingness to take on the issue. In November, it asked to join the Network for Greening the Financial System, a coalition of central banks and bank supervisors from around the world working to manage climate risks. Just days before, Chair Jerome H. Powell told reporters that when it comes to long-term climate risks, “we take it as our obligation to, you know, to understand these risks and incorporate them into the way we supervise and think about the overall financial system and the economy.”

And a month ago, Lael Brainard, a member of the Federal Reserve Board of Governors, announced support for applying a climate scenario analysis and mandatory disclosures to financial firms.

But Daniel Waldman, a senior counsel at Arnold and Porter and a former general counsel at the CFTC, said Biden officials have yet to outline exactly how they will translate their concerns about climate into action. “There is a tremendous amount of activity, but other than people talking about it and insisting on increased sensitivity, it is not entirely clear to me what’s actually happening,” he said.