Climate change poses a systemic risk to financial markets: U.S. Commodity Futures Trading Commission

In a significant development, a landmark report commissioned by the U.S. Commodity Futures Trading Commission, clearly states that climate change poses a “slow motion” systemic threat to the stability of the U.S. financial system, requiring urgent action from financial regulators, including the Federal Reserve and the Securities Exchange Commission.

The report has been put together by a panel convened about 10 months ago by Rostin Behnam.

The panel’s 35 members, including representatives from BP Plc, Goldman Sachs Group Inc, The Nature Conservancy, the Dairy Farmers of America, among others.

“The physical impacts of climate change are already affecting the United States, and … the transition to net-zero emissions may also impact many segments of the economy,” reads the 196-page report.

It goes on to read, “Both physical and transition risks could give rise to systemic and sub-systemic financial shocks, potentially causing unprecedented disruption in the proper functioning of financial markets and institutions.”

A sudden drastic shift in perceptions of the risks from intense hurricanes and frequent wildfires could result in sudden drop in asset prices, which could cascades through a community and spill onto broader markets, said the report.

Since the coronavirus pandemic has depleted government budgets, business balance sheets, and household wealth, the overall economy is at an increased risk than it was before, said the report, “increasing the probability of an overall shock with systemic implications.”

Its first recommendation is to “establish a price on carbon” that is big enough to push businesses and markets to cut use of carbon dioxide-producing fossil fuels such as oil and gas.

Taxing carbon would require action by Congress.

The report’s recommendation also calls for a sweeping rewrite of financial market rules and norms that could go forward without the need to tinker any laws and regardless of who wins the presidency.

Among the proposals: requiring banks to address climate-related financial risks and listed companies to disclose emissions, and to stress test community banks for their resilience to climate change.

Regulators in Europe have worked for years on efforts to calibrate and mitigate climate risks to financial markets.

The report urges financial authorities to integrate climate risk “into their balance sheet management and asset purchases, particularly relating to corporate and municipal debt,” and calls on them to do research into the financial implications of climate change and join international climate-focused groups, including the Network for Greening the Financial System, all of which appear to specifically apply to the Fed.



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