Report Calls for Regulators to Tackle ‘Systemic Risk’ from Climate Change

June 4, 2020 by

Climate change is a systemic risk with wide-ranging potential physical impacts, according to a new report that also serves as a call-to-action for U.S financial regulators to do more to deal with a changing climate.

An eventual transition to a net-zero carbon economy and “other socio-economic ripples” are likely to manifest in cumulative and unexpected ways and are even now creating risks for U.S. financial markets and the broader economy, according to a new report from sustainability advocate Ceres.

The report, Addressing Climate as a Systemic Risk: A call to action for U.S. financial regulators, comes from Ceres’ new Accelerator for Sustainable Capital Markets. It outlines how and why U.S. financial regulators need to recognize and act on climate change as a systemic risk, and provides more than 50 recommendations for financial regulators like the Federal Reserve Bank, the Securities and Exchange Commission, the Financial Stability Oversight Council, as well as state insurance commissioners.

Ceres held a media call earlier this week to discuss the report with Steven Rothstein, the managing director of the Ceres’ Accelerator for Capital Markets, Sen. Sheldon Whitehouse, D-Rhode Island, California Insurance Commissioner Ricardo Lara, and Veena Ramani, senior program director for Ceres’ Capital Market Systems.

During the call Lara, who noted wildfires in his state in 2017 and 2018 combined for “the world’s most expensive natural disaster,” foreshadowed the release of a new database for consumers under development by the California Department of Insurance.

The Climate Smart Insurance Products Database, expected to launch sometime this summer, will house information on insurance products that promote low-emission vehicles by offering lower premiums, products that provide discounts for green energy use and commercial insurance products that give discounts for businesses operating hydrogen and hybrid electric buses.

“It will allow us to send these appropriate market signals to the industry,” Lara said.

Among those signals Lara wishes to send, he said, is that “California, the largest insurance market in the country, is going to continue to be committed to these technologies.”

The Ceres report calls out dangers to the nation’s financial markets from frequent extreme weather events that are “leading to mounting economic losses,” climate impacts that are already manifesting themselves in the largest state economies, as well an unplanned transition to a low-or-zero-carbon economy could cripple key industries.

It’s not just banks that “are on the frontlines of risk.” The report also calls out insurers, and it urges state insurance regulators to take steps to deal with that risk.

“The insurance sector is particularly vulnerable to the physical impacts of climate change, and has already faced growing losses; insurers’ investments are also at risk,” the report states. “Banks and financial institutions that have lent to and invested in risky, carbon-intensive sectors have the potential to have their investments become “stranded” in the face of the transition to a low-or-zero-carbon future.”

This report outlines why and how key U.S. financial regulators can and should take action to protect the financial system and economy from potentially devastating climate-related shocks.

It calls for the Federal Reserve Bank to acknowledge that climate change poses risks to financial market stability and immediately begin assessing their impacts, requiring financial institutions to conduct climate stress tests and work with the Securities and Exchange Commission to require banks to assess and disclose climate risks and explore how climate risks can be addressed through monetary policy.

The report’s authors say insurance regulators should:

  • Acknowledge the material risks climate change poses to the insurance sector and pledge coordinated action to address them.
  • Assess the adequacy of current insurer actions for addressing climate risks.
  • Join the Sustainable Insurance Forum.
  • Require insurers to conduct climate risk stress tests to evaluate potential financial exposure to climate change risks.
  • Require insurers to integrate climate change into their Enterprise Risk Management and Own Risk and Solvency Assessments processes.
  • Require insurers to manage climate risk exposure through their investments.
  • Encourage insurers to develop products for new technologies that will emerge in response to climate risk.
  • Mandate insurer climate risk disclosure using the Task Force on Climate-related Financial Disclosures recommendations.
  • Assess and report the sector’s vulnerabilities to climate change.

Whitehouse on the media call said the fossil fuel industry is making it difficult for Congress to get involved in the fight against climate change by lobbying hard against environmental and climate lawmaking.

“In my world, in my ecosystem, the fossil fuel industry still remains a very venomous adversary of climate action,” he said, adding that much of corporate America is “still more or less completely AWOL.”

“It should come as no surprise that we’re making such little progress in Congress,” Whitehouse said.

Lara said that he and the CDI will embrace guidelines from the Task Force on Climate-related Financial Disclosures. The TCFD, which consists of members including users and preparers of disclosures from across the G20’s constituency covering a range of economic sectors and financial markets, has been working to develop climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers and other stakeholders.

“We, in California, are going to continue to push in integrating TCFD guidelines,” Lara said.

He said he’ll also continue to expand other climate initiatives already underway, such developing a Sustainable Insurance Roadmap, an effort launched last year in partnership with the United Nations.

“We have an opportunity, with these policies, to really re-envision the insurance sector,” Lara said.

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