On September 9, the Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee of the Commodity Futures Trading Commission released a comprehensive report addressing potential risks to the financial system arising from, or related to, climate change. The report is the first of its kind from a US financial regulator. Its findings and recommendations are wide-ranging, frequently extending beyond the CFTC’s remit.
Key findings of the report include:
- “financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions”;
- US financial regulators possess many flexible authorities and tools under existing legislation to begin to address climate change risks without further legislative action;
- insufficient analytical tools and data, as well as the absence of common definitions and standards for data and financial products, constitute a critical constraint on financial regulators’ ability to mitigate climate risks;
- under existing disclosure regimes, corporate disclosures on measuring and managing climate-related financial risks have not been “sufficiently useful to market participants and regulators”; and
- derivatives markets can play a role in mitigating various barriers that have historically reduced the capital allocated to sustainable economic activities.
The report contains 53 recommendations intended to mitigate climate-change risks to the financial markets. Among other things, the report recommends that:
- The United States should establish a fair, economy-wide price on carbon. The report asserts that this is the “single most important step to manage climate risk and drive the appropriate allocation of capital.”
- Federal financial regulators should integrate climate risks into their mandates, develop risk-mitigation strategies that address those risks, and undertake research on the potential financial impact of those risks.
- The Financial Stability Oversight Council incorporate climate risks into its oversight activities, as part of its mandate to identify and monitor threats to financial stability.
- Financial supervisors should conduct pilot climate-risk stress testing and require the entities they regulate to account for climate risks in their existing risk management frameworks.
- Regulators should update and amend existing disclosure frameworks to ensure the availability of more consistent and useful climate-risk disclosures by market participants.
The CFTC press release, including a link to the full report, is available here.
Katten plans to publish an advisory with more detailed coverage of the report.