U.S. Warns Climate Poses ‘Emerging Threat’ to Financial System

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WASHINGTON — Climate change is an “emerging threat” to the stability of the U.S. financial system, top federal regulators warned in a report on Thursday, setting the stage for the Biden administration to take more aggressive regulatory action to prevent climate change from upending global markets and the economy.

The report, produced by the Financial Stability Oversight Council, is the clearest expression of alarm to date about the risks that rising temperatures and seas pose to the economy and could herald sweeping changes to the kinds of investments made by banks and other financial institutions.

It was released as President Biden and senior administration officials prepare to attend the U.N. Climate Change Conference in Glasgow, where the United States will try to demonstrate to the world that it is serious about addressing the climate threat. Mr. Biden’s climate agenda has stalled in Congress, leaving financial regulation as one of the few areas he can point to as evidence of his commitment on warming.

The Biden administration also released a series of reports on Thursday on the threat that climate change poses to national security, saying it increases the risks of conflict within and between countries and could potentially displace tens of millions of people around the world.

The report by the Financial Stability Oversight Council, which is led by the Treasury secretary and includes leaders from the major financial regulatory agencies, portrayed the financial threat of climate change in stark terms. Higher temperatures are leading to more natural disasters, such as hurricanes, wildfires and floods. These, in turn, are resulting in damaged property, lost income and disruptions to business activity that threaten to alter how assets, such as real estate, are valued.

At the same time, the move away from fossil fuels could cause a sudden drop in the price of stocks and other assets tied to oil, gas, coal and other energy companies, or sectors that rely on them such as carmakers and heavy manufacturing. Such a shift could hurt the stock market, retirement savings and other parts of the financial sector.

“The financial sector may experience credit and markets risks associated with loss of income, defaults and changes in the value of assets,” the report said, adding that liquidity and legal risks are also concerns.

The council warned that low-income communities and people of color were disproportionately at risk from climate change because they lacked the resources to protect their properties and weather a loss of income. This dynamic threatens to exacerbate income inequality in the United States.

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Damage to a neighborhood in Queens from the remnants of Hurricane Ida in September.Credit…Benjamin Norman for The New York Times

The report made a series of broad recommendations; however; it avoided the type of policy prescriptions that environmental groups and progressive Democrats have been demanding from the Biden administration. For instance, it did not recommend that banks be subjected to tougher rules such as assessing their ability to withstand climate-related losses, new capital requirements or curbs on extending financing to fossil fuel companies.

Nor did it include specific timelines or other milestones that it wants financial regulatory agencies to meet.

The report did recommend the formation of a financial risk committee, more rigorous analysis of the effects of climate change on the insurance industry and greater coordination with climate experts to better understand the economic and financial impact of the emerging threat.

The council did say it supports work that the Securities and Exchange Commission is doing to develop rules that could require companies to disclose how climate change risks could affect their operations or earnings. It added that regulators should review whether to require banks to report more information about their climate-related risks. The council includes the leaders of the S.E.C., the Federal Reserve and other banking regulators.

The Biden administration has previously said climate change is an existential crisis, but large portions of its climate agenda remain stalled in Congress. Environmental groups have argued that the Biden administration is not acting quickly or ambitiously enough after four years during which the Trump administration dismissed the threat of climate change and rolled back environmental safeguards.

Some environmental groups have suggested that the recommendations were scaled back because Treasury Secretary Janet L. Yellen, who chairs the council, was seeking a consensus document that would be acceptable to all members. Two members — Jerome H. Powell from the Fed and Jelena McWilliams from the Federal Deposit Insurance Corporation — were appointed to lead their agencies by former President Donald J. Trump. Ms. McWilliams was the lone member of the council who abstained from voting to endorse the report on Thursday.

Ms. Yellen, who will travel to Glasgow for the U.N. conference next month, hailed the significance of the report at the council’s meeting on Thursday.

“It’s a critical first step forward in addressing the threat of climate change and it will by no means be the end of this work,” Ms. Yellen said.

Ben Cushing, manager of the Sierra Club’s Fossil-Free Finance campaign, said that the report was a step in the right direction but that it needed to be more bold. He said that Wall Street firms were contributing to the climate crisis and that regulators must rein them in.

“Secretary Yellen’s report lays out preliminary steps to make the financial industry more transparent and accountable for their growing climate risks, but it’s also a missed opportunity to recommend actions that actually reduce climate risk and limit Wall Street’s toxic investments in the fossil fuels that are driving the crisis,” Mr. Cushing said.

The next step is for the various financial regulators to act on the warnings in the report, said Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, which works with investors to address climate risks.

“Banks, insurance and fossil fuel companies should be on notice,” Mr. Rothstein said. “Each agency must now provide specific timelines when they plan to put in place measures to protect the safety and soundness of our financial system, our institutions, our savings and our communities.”

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