Assessing the financial costs of climate failure
The U.S. just wasted four years not developing a plan to deal with the financial costs of global warming and a transitioning economy. We're now playing catchup.
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The most intriguing question about Joe Biden’s new Executive Order directing federal agencies to develop a comprehensive strategy to identify and manage financial risks to government and the private sector posed by climate change is why don’t we already have such a plan.
The role of global warming in the frequency and severity of extreme weather events—wildfires, floods, hurricanes, droughts, rising seas—has been understood for many years. So has the recognition that transitioning from a fossil fuel-driven economy to a mostly renewable economy will be a costly financial disruption for many industries and individual companies.
The potential costs of unmitigated physical climate change are beyond staggering. Last month, a study from Swiss Re, the global insurance giant, predicted that if no mitigating action is taken, global temperatures could rise by more than 3°C and the world stands to lose close to 10 percent of total economic value by mid-century if climate change stays on the currently-anticipated trajectory, and the Paris Agreement and 2050 net-zero emissions targets are not met.
With so much at stake, you would think there would be some sort of international body that focuses on climate-related financial risk and, of course, you would be right.
The Network for Greening the Financial System (NGFS), launched at the Paris One Planet Summit on 12 December 2017, is a group of central banks and supervisors, which on a voluntary basis share best practices and contribute to the development of environmental and climate risk management in the financial sector, and to mobilize mainstream finance to support the transition toward a sustainable economy.
The NGFS brings together 89 central banks and supervisors and 13 observers representing five continents and around 75 percent of global greenhouse gas emissions. They are responsible for the supervision of all of the global systemically important banks and two-thirds of global systemically important insurers.
The climate mitigation scenarios developed by the NGFS in collaboration with the Intergovernmental Panel on Climate Change of the United Nations (IPCC) have been a major step in providing financial actors with forward-looking views on how low and high-carbon economic activities could evolve over the next decades. As a result, several countries already have strong climate standards in place.
The U.S. Federal Reserve didn’t join the group until December 2020 about one month after the resounding defeat of our former twice-impeached one-term president. I suspect that is not a coincidence. Wrote Greg Gelzinis, an associate director for Economic Policy at American Progress:
Many NGFS members have begun to adapt their core regulatory and supervisory frameworks accordingly. The United States, however, remains painfully behind. The Federal Reserve announced that it finally joined the NGFS in December 2020, but it remains the only federal financial regulator from the United States to have joined the coalition.
The lack of engagement on this issue internationally undermines the U.S. role as a leader both on climate policy and financial services policy. U.S. federal regulators have not yet taken any meaningful steps to embed climate risk considerations into their regulatory and supervisory frameworks. To the contrary, some Trump-appointed regulators actually advanced policies that would actively prevent financial institutions from accounting for climate risk.
In stark contrast to the past four years of neglect, Biden has made slowing climate change a top priority and has set a target to cut U.S. greenhouse gas emissions by up to 52 percent below 2005 levels by 2030. He also has said he expects to adopt a clean energy standard that would make electricity carbon-free by 2035, along with the wider goal of net-zero carbon emissions by 2050.
The new executive order directs White House climate adviser Gina McCarthy and economic adviser, Brian Deese, to develop a government-wide strategy within four months to identify and disclose climate-related financial risks and asks Treasury Secretary Janet Yellen and the White House Office of Management and Budget to improve climate-related disclosures and to incorporate climate-related financial risk into regulatory and supervisory practices. The Labor Department will analyze how to protect pensions from climate-related risk. In a statement, the White House writes:
From signing a loan for a new home or small business to managing life savings or a retirement fund—it is important for the American people to have access to the information needed to understand the potential risks associated with these significant financial decisions. We know that the climate crisis, whether through rising seas or extreme weather, already presents increasing risks to infrastructure, investments, and businesses. Yet, these risks are often hidden.
With so much at stake, this Executive Order ensures that the right rules are in place to properly analyze and mitigate these risks. That includes disclosing these risks to the public, and empowering the American people to make informed financial decisions.
The Securities and Exchange Commission has already begun work on potential regulations that would require companies to disclose risks related to global warming, while Federal Reserve Chairman Jerome Powell said his agency has begun taking steps to assess climate change-related risks to the banking system. (Twelve Republicans sent him a letter discouraging such action.)
Most US financial institutions are accelerating the development of their compliance departments in anticipation of new rules regarding environmental, social and governance (ESG) issues, including rules on ESG disclosures that will limit, and possibly punish, banks that lend money to clients that are actively ignoring policies on climate change. Such a move would bring the U.S. in line with other jurisdictions’ mandated sustainability reporting rules, including the UK and European Union.
It may be just a coincidence but since President Biden took office, America’s leading financial institutions JPMorgan, Citigroup, and Bank of America have pledged to facilitate at least $4 trillion for sustainable and climate-friendly deals over the next decade. Say what you will about Sleepy Joe but no president in my considerable lifetime has so thoroughly placed the environment at the center of his agenda. Count me pleased.
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Dig Deeper
Executive Order on Climate-Related Financial Risk (White House)
Fact Sheet on EO (White House)
Climate change will devastate the world economy by 2050 if we don't get serious now, people. (EarthWatch)
Addressing Climate-Related Financial Risk Through Bank Capital Requirements (Center for American Progress)
Biden order on climate financial risk reaches deep into the economy
The woman who discovered global warming
Good related story in Axios this morning: How the global warming fight is reshaping finance
https://www.axios.com/newsletters/axios-markets-5be8b48b-57a1-453d-b8b3-c588f944c05b.html?chunk=0&utm_term=emshare#story0
South Texas and many parts of Louisiana are under water AGAIN. Why would banks give loans for rebuilding in these areas? Why would insurance companies write policies protecting the folks who want to rebuild there? If we believe that environmental degradation is going to get worse then this insanity of living in places not fit for humans needs to stop sometime soon.