FSOC report shows climate change is "emerging threat" to U.S. economy

·3 min read

A top U.S. financial coordinating organization took several steps on Thursday to manage the growing risks that climate change poses to the U.S. financial system.

Why it matters: While the Biden administration has been taking an all-of-government approach to climate change, like factoring climate risk into planning at the Treasury Department, today's moves by the politically independent Financial Stability Oversight Council (FSOC) carry significant weight.

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  • The FSOC grew out of the 2008 financial crisis and is a coordinating body that is aimed at preventing financial shocks that lead to broader, systemic risks.

The big picture: The top-level conclusion of the report is that the FSOC, headed by Treasury Secretary Janet Yellen, "[v]iews climate-related financial risks as an emerging threat to the financial stability of the United States."

  • This is due to the disruptions that could occur while transitioning away from a fossil fuel-intensive energy system as well as physical damage from extreme weather events, sea level rise and other impacts of climate change.

Details: The council will form two committees to help financial regulators better understand climate change-related risks to the financial system by bringing in experts from environmental organizations, climate scientists from federal agencies and others.

  • One will be the first formal committee created by the council in a decade, according to a senior Treasury Department official. The other committee will be the first-ever advisory committee created by the FSOC, they said.

  • The report aims to ensure regulators have a better idea of climate change-related risks to the entities in their purview, such as banks and insurance companies.

  • The FSOC also recommends that its members "consider" enhancing public reporting requirements for climate-related risks, potentially including disclosure of greenhouse gas emissions.

Yes, but: That call for more information signals a go-slow approach, however in another section of the report, the FSOC says inaction is problematic.

  • "Council members recognize that the need for better data and tools cannot justify inaction, as climate-related financial risks will become more acute if not addressed promptly," the report states.

What they're saying: Climate activists had been looking to the FSOC report for new, clear guidance that would push financial institutions away from supporting fossil fuels.

  • Instead, the report mainly calls for banks to analyze their holdings and consider the potential risks of stranded assets as the energy sector shifts toward clean energy sources.

  • "The report could have been stronger and could have laid out more of the regulatory tools available to deal with a systemic risk like climate change," Ben Cushing, Sierra Club fossil-free finance campaign manager, told Axios.

  • "I think this is neither the finish line of the race to regulate climate and the financial risk of climate in the U.S. economy and worldwide, neither is it the starting gun," Daniel Firger, managing director at Great Circle Capital Advisors, told Axios.

Context: The report is among multiple analyses and strategy documents called for under a May executive order on climate-related financial risk.

  • The FSOC document is the result of months of work to enhance climate-related disclosures, assess climate-related financial risks and promote resilience. Thursday's report makes clear the assessment work is far from complete.

  • A report the White House released last week called climate change a "systemic risk" to the financial system. A separate forthcoming set of climate risk disclosure requirements is expected from the SEC within the next several months.

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