How the financial system can—and should—address climate risk

In our accelerating climate crisis, the increasing frequency of droughts, fires and natural disasters – in addition to our continued reliance on fossil fuels – comes with dire financial consequences. The unpredictability of climate change lends itself to high risk – a risk that Sarah Bloom Raskin says financial institutions need to start taking into account when planning for a stable economic future.

During GreenBiz Group GreenFin22 event in New York last week, the former Under Secretary of the Treasury and member of the Board of Governors of the Federal Reserve said: “A collision of climatic, financial and economic forces is creating a reinvented capitalism for a warming planet, or a warming world.”

Earlier this year, Raskin, President Joe Biden’s Federal Reserve nominee, withdrew her candidacy to serve at the nation’s central bank after her views on climate policy split the Senate over her nomination. Raskin, who had already been confirmed to the agency twice, argues that despite growing climate politicization, climate change assessment remains firmly in the Federal Reserve’s wheelhouse: “The Federal Reserve has an explicit mandate to examine financial stability and monitor financial risk They must identify risk, monitor it and address it, particularly if it has the potential to create systemic problems It is well established that the climate presents the risk of creating problems systemic.

A collision of climatic, financial and economic forces creates a reinvented capitalism for a warming planet or world.

Raskin warned that the political knee-jerk reaction to the climate could have adverse consequences for the free market, referring to recent laws passed in West Virginia and Texas that authorize legislative action against business with financial companies that discriminate against fossil fuels. with their environmental, social and governance (ESG) impact. “From what I can discern, these laws are essentially disguised subsidies to particular industries that really need to adjust…” Raskin said. “I think [the laws] are anti-investor because they try to limit investor choice. … It ties the hands of investors looking to the economy of the future and looking for ways to create that economy through their investment decisions.”

Despite a divisive political climate, Raskin remains optimistic about the role the country’s strong financial regulatory system can play in facilitating an easier climate transition for the economy. The U.S. Securities and Exchange Commission’s recent decision to introduce disclosure rules for funds and managers that present themselves as ESG-focused is just the start of widespread climate-focused action that, according to Raskin, can occur across regulatory bodies such as the Fed, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency. To streamline this action, she identified the Financial Stability Supervisory Board as an existing agency with the resources to serve as an organizing body: “[The FSOC] brings together all the leaders of all the agencies. It is the entity that can coordinate a comprehensive, coherent and well-planned set of regulatory levers.”

The Bank for International Settlements’ Annual Report for 2021-2022 suggests that amid high inflation and a possible deceleration in economic growth, a timely increase in green energy investment could yield relatively low short-term costs and persistent long-term gains . “You now see this concept of energy security and investing in green energy as being critical to whether or not we get a soft landing as we go through this…” Raskin said. “[There is] significant financial vulnerability presenting as a disorderly energy transition. If we don’t make the transition in an orderly, predictable and early way, we’re going to see a lot more chaos in the financial markets.”

As finance moves forward in building the infrastructure to support the energy transition, Raskin stressed the importance of keeping climate justice at the forefront of the conversation. “How to integrate a notion of climate justice into the regulatory framework? ” she asked. “We know that these regulatory tools can be brutal, and if not used in a targeted way, you can have adverse effects. One of those adverse effects would be that everything gets moved into unregulated sectors or if everything is downloaded to the government and taxpayers.We absolutely have to think about the distributive element.

[Interested in more coverage of GreenFin 22? Read more here.]


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Don F. Davis