❮ Return to Our Work

Op-Ed | The American Prospect | March 10, 2021

Will Financial Regulators Act On Climate?

ClimateExecutive BranchFinancial Regulation
Will Financial Regulators Act On Climate?

Read this article on the original website.

Climate advocates have been pushing financial regulators hard in recent years to label climate change as a systemic risk to the financial system and enact stringent regulations to end investment in climate-destroying industries. Financial regulators have shown in recent weeks that they are listening to the language, if not necessarily the substance, of these activists.

Federal Reserve Board Governor Lael Brainard last month acknowledged that climate change will have a “profound effect” on the economy, addressing the “growing evidence” of severe natural disasters. She called for financial institutions to respond to both “physical risks” (things like rising sea levels wiping out beachfront communities) and “transition risks” (the economic push-pull that will come with moving to a low-carbon economy, such as the loss of fossil fuel jobs). But in her February 18th speech the next day, she praised the industry-led Task Force on Climate-related Financial Disclosures for its work on the subject.

Even when she dares to take a stand in favor of something like mandatory disclosure standards, Brainard can’t help but walk it back, seemingly in fear of upsetting industry actors. After admitting last month that mandatory disclosure requirements would be better than voluntary efforts, Brainard waffled and added (without evidence) that mandatory requirements “are prone to variable quality, incompleteness and a lack of actionable data.” How can Brainard and others be expected to take necessary climate action when they won’t even commit to mandating honesty from industry actors?

Treasury Secretary Janet Yellen is not immune to this trend, either. She announced in February that the Treasury Department may be able to facilitate climate “stress tests” on banks and insurers, but that they probably would not impose capital requirements (the amount of liquid assets banks are required to have on hand) or limit the amount of money paid out to shareholders at any given time (which current non-climate-related stress tests do). She seemed content with the results simply being “very revealing.”

Brainard and Yellen testing the waters of climate-related financial regulation is undoubtedly a good thing when measured against practices from earlier administrations. Former President Barack Obama’s administration took an aloof approach on both climate change and financial regulation, and the Trump administration was mostly just a cheerleader for polluters. But “good relative to past failures” is no match for a planet (and an economy) hurtling ever faster toward apocalypse.

Using the right language clearly has little to no correlation with taking the necessary action. We need only look at President Biden’s promise to “always lead the way with science” before issuing over 30 new oil and gas drilling permits in his first week as president to see this is true.

Most financial regulators, like Brainard, have belatedly learned to publicly acknowledge that climate change poses enormous risk to the global financial system. Her slow-walking, however, raises serious questions about whether that rhetorical change comes from a dedication to preventing mass extinction or just a desire to remain employable in Democratic administrations.

Slow-walking has consequences, too. A financial system without strong regulation and enforcement is vulnerable to industry influence, which we are already seeing. For instance, without mandatory standards for disclosing climate risk, industry actors are rushing to convince the world that they can regulate themselves. Yellen and Brainard are both explicitly supporting industry-led regulation (by giving it credibility) and implicitly supporting it (by not taking urgent government action to replace it).

The industry-led Task Force on Climate-related Financial Disclosures seems at face value to be encouraging, if only judging by its name. But a closer look reveals its flaws, beginning with the fact that its chair is none other than billionaire Michael Bloomberg. In a video on the task force’s website, the financial executives who composed its disclosure requirements proudly proclaim that they “don’t want to overburden the firms” and are “very focused on not creating a lot of extra work.” Well, sorry to say, staving off planetary death will by its nature include work (and isn’t hard work what conservatives want, anyway?).

The task force Brainard praised recommends a series of voluntary disclosures which urge companies to “[take] into consideration different climate-related scenarios, including a 2°C or lower scenario.” A recent report by Reclaim Finance and Oil Change International eloquently described the danger of this practice in reference to a study from Network for Greening the Financial System, a coalition of central banks: “By putting forward and branding as ‘representative’ scenarios that would let global warming reach 2 degrees Celsius (°C) or higher, the report implicitly encourages readers to ignore scenarios that would limit warming to 1.5°C. This has the effect of downplaying the difference in physical risk associated with 2°C warming compared to just 1.5°C warming, despite the findings of the United Nations’ Intergovernmental Panel on Climate Change (IPCC) that the difference in climate impacts between 1.5°C and 2°C warming is stark.”

The dark history of self-“regulation” is well documented. The common thread between industries is a massive failure to promote the public interest. See, for example, the American Petroleum Institute’s March 2021 announcement that they would support a price on carbon emissions “as the primary government climate policy instrument to reduce CO2 emissions while helping keep energy affordable, instead of mandates or prescriptive regulatory action.” As if tweaking the free-market economy while adding fuel to the fire, literally, was an ample solution to humanity’s greatest crisis. With this history, how can the financial industry be trusted to self-regulate on a matter so paramount to survival?

Indeed, the Task Force on Climate-related Financial Disclosures’ own studies confirm self-regulation’s inviability. Its third annual report, released last October, showed abysmal corporate compliance with its voluntary standards; energy and construction companies were the most likely to disclose climate-related information, and they had a mere 40 percent compliance rate. Moody’s Analytics conducted two other, methodologically distinct reviews of compliance with the task force requirements, and found similarly dismal results. The only world region whose companies show adequate compliance is Europe, because the European Commission integrated the task force’s recommendations into its Guidelines on Reporting Climate-Related Information. Regardless of any problems with the task force’s methodology, this demonstrates that the only way to get companies to actually comply with any unflattering disclosure standards is with the threat of government force.

Yellen’s proposal for “revealing” risk and conducting entirely toothless stress tests and Brainard’s deference to the industry beg the question—what good is it to be aware that financial institutions are unable to withstand climate-related damages, and are actively fueling climate destruction, without doing anything to change it?

In a battle between lost banker profits and the health of the planet, these regulators must reflect in their actions the urgency activists exhibit and science demands.

ClimateExecutive BranchFinancial Regulation

Related Articles

More articles by Dorothy Slater

❮ Return to Our Work