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WASHINGTON — Senior federal regulators warned in a report Thursday that climate change is an “emerging threat” to the stability of the US financial system, laying the groundwork for the Biden administration to take more aggressive regulatory action to prevent climate change from wreaking havoc on global markets. and economy.
The report by the Financial Stability Oversight Council is the clearest statement to date about the risks posed by rising temperatures and seas to the economy, and could herald sweeping changes in the types of investments banks and other financial institutions make.
It was released as President Biden and senior management officials prepare to attend the UN Climate Change Conference in Glasgow, where the United States will try to show the world that it is serious about addressing the climate threat. Mr. Biden’s climate agenda stalled in Congress, leaving financial regulation as one of the few areas in which he can cite as proof of his commitment to warming.
Biden administration also released a series of reports He said on Thursday that climate change poses a threat to national security, increases the risks of conflict within and between countries, and could potentially displace tens of millions of people worldwide.
The report of the Financial Stability Oversight Council, led by the secretary of the treasury and featuring the leaders of the leading financial regulators, portrayed the financial threat of climate change in strict terms. Higher temperatures lead to more natural disasters such as hurricanes, wildfires and flooding. These, in turn, cause damage to property, loss of income and disruption to business activities that threaten to change how assets such as real estate are valued.
At the same time, a move away from fossil fuels can cause a sudden drop in the prices of stocks and other assets tied to oil, gas, coal and other energy companies, or sectors that depend on them, such as automakers and heavy manufacturing. Such a change could hurt the stock market, pension savings, and other parts of the financial industry.
“The financial sector may experience credit and market risks associated with loss of income, defaults and changes in the value of assets,” said the report, while liquidity and legal risks are also a cause for concern.
The council warned that low-income communities and people of color are disproportionately at risk from climate change as they lack the necessary resources to protect their property and prevent loss of income. This dynamic threatens to exacerbate income inequality in the United States.
The report made a number of broad recommendations; Again; He avoided the kind of policy prescriptions that environmental groups and progressive Democrats had demanded from the Biden administration. For example, the assessment of banks’ ability to withstand climate-related losses did not recommend subjecting them to stricter rules, such as new capital requirements or restrictions on financing fossil fuel companies.
It also did not include specific timelines or other milestones that financial regulators wanted it to meet.
The report recommended the creation of a financial risk committee, more rigorous analysis of the impacts of climate change on the insurance industry, and greater coordination with climate experts to better understand the economic and financial impact of the emerging threat.
The Council said it supports the work of the Securities and Exchange Commission to develop rules that may require companies to disclose how climate change risks could affect their operations or earnings. He added that regulators should review whether they want banks to disclose more information about their climate-related risks. The Council includes the leaders of the SEC, the Federal Reserve, and other banking regulators.
The Biden administration has previously said climate change is an existential crisis, but much of the climate agenda rests in Congress. Environmental groups have argued that after four years of the Trump administration denying the threat of climate change and rolling back environmental measures, the Biden administration was not acting fast or ambitious enough.
Some environmental groups have suggested that the recommendations have been curtailed as the council’s chair, Treasury Secretary Janet L. Yellen, sought a consensus document acceptable to all members. Two members – Jerome H. Powell of the Fed and Jelena McWilliams of the Federal Deposit Insurance Corporation – were appointed by former President Donald J. Trump to lead their agency. Ms. McWilliams was the only member of the council who did not vote to approve the report on Thursday.
Yellen, who will travel to Glasgow for the UN conference next month, hailed the report’s significance at Thursday’s council meeting.
“It is a critical first step towards the threat of climate change and by no means will this work be the end of it,” he said.
Ben Cushing, director of the Sierra Club’s Fossil-Free Finance campaign, said the report is a step in the right direction but needs to be bolder. He said Wall Street firms are contributing to the climate crisis and that regulators should rein in them.
“Secretary Yellen’s report lays out preliminary steps to make the financial sector more transparent and accountable for increased climate risks, but at the same time is a missed opportunity to recommend actions that truly reduce climate risk and limit Wall Street’s toxic investments in fossil fuels. . crisis,” said Mr. Cushing.
Steven M. Rothstein, managing director of Ceres Accelerator for Sustainable Capital Markets, which works with investors to address climate risks, said the next step is for various financial regulators to act on the warnings in the report.
“Banks, insurance and fossil fuel companies should notify,” Mr. Rothstein said. “Each institution must now provide specific timelines when planning to take action to protect the safety and soundness of our financial system, institutions, savings and communities.”
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