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Analysis

November 23, 2021

Better Markets’ Work Addressing Climate Change in Finance

The reality of climate change is indisputable—average global temperatures are rising, as are sea levels, threatening coastal cities and communities. It’s been made clear by a number of organizations, including the United Nations, that unless countries around the world follow through on commitments to reduce CO2 emissions, this is just the beginning.

Climate change looms as one of the inevitable triggers of profound instability and eventual crisis in our financial system and our entire economy if it is not aggressively attacked on all fronts.  Better Markets’ objective is to wage that fight in the financial regulatory sphere. It’s our view that banks and other financial institutions have not been doing enough to manage and account for the risks of climate change or to support the transition towards a more sustainable economy.

Put differently, change is certain, but progress is not. Change happens when people in power exercise that power, but progress only happens when those people exercise that power to serve the public interest.  In this case, that means doing all that is possible within their jurisdictions and mandates to confront and combat the many risks to the financial system and the country from the climate crisis.

While focusing on individual issues at individual agencies can still be important, a comprehensive, coordinated, and integrated approach to finance, the financial markets, and the financial regulatory agencies need to be developed and implemented to prioritize ESG across all the agencies and, thereby, in the markets they regulate.

Because Better Markets is engaged at all the regulatory agencies (highlighted by the report “The Road to Recovery: Protecting Main Street from President Trump’s Dangerous Deregulation of Wall Street”), it is ideally positioned to develop a comprehensive, coordinated, and integrated approach to finance, the financial markets, and the financial regulatory agencies.  Moreover, because Better Markets has developed a unique advocacy approach to the financial regulatory process (which we call our “Arc of Advocacy™”), it is well-positioned to turn that approach into an actionable plan that gets results.

What is the role of the financial regulatory agencies?

All the financial regulatory agencies have direct and important roles to play in mitigating the impact of climate on the financial system, and the consumers, investors, and small businesses that rely on the resiliency, accessibility, and stability of the financial system.

  • The Securities and Exchange Commission (SEC) — The SEC has clear statutory authority to require the disclosure of climate or, more broadly, environmental, social, and governance-related information (ESG information) from publicly traded companies.  This information could empower and enable investors to make more informed investment decisions about how to allocate their hard-earned money. This information could also support the investment decisions of large, institutional investors—such as retirement funds, endowments, and other pools of capital—to direct their significant capital to environmentally- and socially-friendly companies and commercial endeavors.
  • The Commodity Futures Trading Commission (CFTC) — The CFTC has clear statutory authority to manage all things related to the derivatives markets, including risk management and price discovery. These markets have direct and indirect effects on ESG objectives. Speculative position limits have direct demonstrable effects on commodity prices and therefore capital allocation and investments in all of the major energy and agricultural commodities, including fossil fuels used in various economic activities.  Less directly, however, the integrity of early-stage private markets in environmental commodities may be key to future market design initiatives and/or determinations to seek alternative means for achieving ESG objectives.
  • The U.S. Department of Treasury (Treasury) — Treasury is where the Financial Stability Oversight Council (“FSOC”) is situated.  The FSOC, which is chaired by the Secretary of the Treasury, should play a key role in addressing the risks of climate change. This unique and potentially very effective organization was established in the Dodd-Frank Act for the specific purpose of identifying emerging risks to financial stability and promoting market discipline. Their authority includes the designation of nonbank financial companies as systemically important and their resulting supervision and regulation by the Federal Reserve.
  • The Banking Agencies (the Fed, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC)) — The Agencies should be using their supervisory and regulatory authorities to continually assess, monitor and address both the micro-prudential (at each individual bank) and macro-prudential (across banks and the system) risks of climate change. Without question, climate change is posing increasingly significant risks to the banking system, financial stability, payment system promotion, and consumer protection.

How is Better Markets working to move the regulators in the right direction?

One example is our latest report on Climate Change and the Banking System, which explores how the Federal Reserve (the Fed) and other financial regulatory agencies can and should play vital roles in addressing climate change. Another is, in June, in response to the latest activity at the regulatory agencies, Better Markets filed a comment letter urging the Securities and Exchange Commission (SEC) to establish a new disclosure framework for climate-related risks that companies face.

Want to stay in the loop? Stay tuned. This page will be regularly updated with Better Markets’ latest analyses on the intersection of climate and finance.

Better Markets Key Information

Here are a few key actions that Better Markets has taken to push for climate accountability and oversight in the financial system:


Blogs/Reports


Joint/Comment Letters


Press Releases


Media Hits

 

 

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