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Biden administration expected to deliver on climate-related financial promises in 2022

17 December 2021 Amena Saiyid

2022 will be the year US financial regulatory agencies deliver on President Joe Biden's May 2021 order to respond to the financial risk and resulting liability that the increasingly intense and frequent climate impacts pose to the nation's economy and its people.

The agencies will be responding to Biden's call to "advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk" that includes physical or direct impacts from extreme weather events such as the tornadoes that ripped through six states on 11 and 12 December causing immense loss of life and property. The disclosures also pertain to transition risks stemming from shifts in policy, consumer and business sentiment, or technologies associated with the changes necessary to limit climate change.

In the Roadmap to Build an Economy Resilient to Climate Change Impacts, Biden illustrated his administration's determination to use financial regulation and policies to protect consumers, especially those that are disadvantaged and belong to minority groups, and the economy from the impacts of climate change.

"Addressing climate-related financial risks is an urgent priority and will require our collective efforts," US Secretary of the Treasury Janet Yellen said at the 17 December virtual meeting of the US Financial Stability Oversight Council (FSOC) she chaired. Congress created the council in 2010 after the subprime mortgage crisis to identify and monitor risks as well as respond to emerging threats to financial stability.

Coordinating agency action

At that meeting, the FSOC voted unanimously to create a new Climate-related Financial Risk Committee (CFRC) that will be charged with coordinating the efforts among various agencies to identify, assess, and mitigate climate-related financial risks.

Elaborating on the duties of this committee, Deputy Treasury Secretary Sandra Lee said the CFRC will be charged with "identifying priority areas for assessing and mitigating climate-related risks to the financial system, facilitating information sharing and coordination among staff of council members and member agencies relating to climate-related risks, and coordinating efforts among council members and member agencies to address data gaps and to develop data standards regarding such risks."

The FSOC also approved its 2021 report, which Lee said was the first council report to "Identify climate change as an emerging threat to the financial stability of the United States."

Also present at the FSOC meeting was Michael Hsu, the acting head of the Office of Comptroller of the Currency (OCC), who said the OCC a day earlier had asked for public feedback on a set of draft principles for climate-related financial risk management for national banks, federal savings associations, and federal branches or agencies of foreign banking organizations with more than $100 billion in total assets. The public comment period is open through 14 February.

Control climate-related financial exposures

The OCC's notice said the principles will enable large banks to identify, measure, monitor, and control potential climate-related exposures, providing them with a high-level framework for safe and sound management that is consistent with the agency's existing rules and guidance.

"We are hopeful that the principles will promote and accelerate improvements in banks' climate risk management practices," Hsu said.

The OCC's request came two days after the Network for Greening the Financial System, which represents 102 central banks across five continents, came out with a "how-to" guide for incorporating climate risk into governance, strategy, and risk management of such institutions.

The US Federal Reserve Board, also a member of the FSOC, is among the central banks. Since the start of the year, the Fed has been studying how best to fold climate risk into its own operations and into its policies for overseeing financial institutions.

Fed Chairman Jerome Powell agreed with Hsu at the meeting that "a consistent approach across bank regulatory agencies will best support the effective management of these risks." However, he once again chose not to share any timeline for when the Fed would start accounting for climate risks in its own strategies, risk management, and governance.

Climate disclosure proposal

FSOC member and US Securities and Exchange Commission (SEC) Chairman Gary Gensler also said the agency is working on a proposed climate disclosure rule for publicly traded companies that could come out as early as January.

Based on the guidance public companies received from the SEC in late September, the proposed rule could require public companies to provide the same level of detail in climate-related financial disclosures as they do in their routine corporate disclosures.

The SEC told companies to expect questions about "the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes."

Lawyers who follow the SEC regulations said the agency's September guidance was a harbinger of what to expect from the proposed rule.

According to Steven Rothstein, managing director of Ceres' Accelerator for Sustainable Capital Markets, the proposed SEC rule could include some sort of indication whether the SEC will require companies to subject their reporting to third-party audits, which large US banks have said they oppose.

Protecting consumers and investors

All federal agency heads seemed to agree that consumers need to be protected against the financial impacts of climate change, both on their own property and as investors. For instance, the Treasury's Federal Insurance Office (FIO) has received many a comment that the federal government lacks a systemic picture of insurance against climate impacts, especially among disadvantaged groups. It is expected that the FIO will respond to these comments with some sort of data gathering effort in 2022.

Biden's roadmap also discusses the difficulty that pension plan managers face under the current US regulatory framework to adequately consider climate-related financial risk when they invest workers' pension funds. Therefore, the US Department of Labor is leading efforts to remove regulatory barriers to ensure that employee benefit plan fiduciaries can incorporate material climate-related risks into their investment decisions. The rule was proposed in October 2021, and a final rule is expected in 2022 that will amend federal retirement plan regulations known as ERISA to allow such considerations.

Posted 17 December 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst

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