The Treasury Department’s Financial Stability Oversight Council is out with a new report identifying climate change as an emerging threat to U.S. financial stability.
“FSOC’s report and recommendations represent an important first step towards making our financial system more resilient to the threat of climate change,” Treasury Secretary Janet Yellen said in releasing the report Oct. 21. “These measures will support the Administration’s urgent, whole-of-government effort on climate change and help the financial system support an orderly, economy-wide transition toward the goal of net-zero emissions.”
The report approved by the FSOC includes more than 30 recommendations to U.S. financial regulators to help identify and address climate-related risks to the financial system and “promote the resilience” of the financial system to those risks. The recommendations fall into four main categories:
- Assess climate-related financial risks to financial stability, including through scenario analysis, and evaluate the need for new or revised regulations or supervisory guidance to account for climate-related financial risks.
- Enhance climate-related disclosures to give investors and market participants the information they need to make informed decisions, which will also help regulators and financial institutions assess and manage climate-related risks.
- Enhance actionable climate-related data to allow better risk measurement by regulators and in the private sector.
- Build capacity and expertise to ensure that climate-related financial risks are identified and managed.
With respect to disclosures, the report notes that FSOC members should “promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to take climate-related financial risks into account in their investment and lending decisions.”
To that end, the report argues that investors, market participants and regulators need better data and information, including enhanced and transparent disclosures, to assess climate-related financial risks and their potential effects on the financial system.
While the report recommends that FSOC members take new actions on climate change data, disclosure and scenario analysis, it also discusses how individual members are already taking steps. For example, the Securities and Exchange Commission (SEC) staff has begun working on a rulemaking proposal on climate risk disclosure by public issuers. Staff also has begun to review whether fund managers should disclose the criteria and data used related to their environmental, social and governance (ESG) and green marketing.
“What investors want changes over the decades; we’ve added Management Discussion and Analysis, executive compensation, and other disclosures over the decades. In the 2020s, investors want to know more about climate risk,” SEC Chairman Gary Gensler stated before the council meeting. “I believe the SEC has a role to play in cases like this to facilitate consistent, comparable, and decision-useful disclosures from companies. This helps investors, and it helps companies. Thus, SEC staff is developing a proposal for the Commission’s consideration,” Gensler added.
The FSOC report follows the Biden administration’s release of a strategy report Oct. 15 outlining its government-wide effort to address climate change, as well as release of the Labor Department’s proposed guidance addressing the use of ESG factors in selecting plan investments.
The FSOC was established within the Treasury Department by the Dodd-Frank Wall Street Reform and Consumer Protection Act to identify and respond to emerging threats to U.S. financial stability. The committee consists of 10 voting members and five nonvoting members, including federal financial regulators, state regulators and an independent insurance expert appointed by the President.
