Treasury Secretary Yellen to Lead Investigation into Climate Risk to Financial System

Jul 21, 2021Federal Regulation, News

Treasury Secretary Janet Yellen recently announced that she will lead an investigation looking into the risks that climate change could have on financial stability in the U.S., as part of an analysis by the Financial Stability Oversight Council (FSOC), which Yellen chairs. Yellen made her remarks at the Venice International Conference on Climate.

“Climate change also introduces new and increasing types of risk,” Yellen said. “The risks from more frequent and severe natural disasters—so-called physical risks—have, and will continue to become, more prominent. Then there are the risks that may accompany the technological, market, and policy changes needed to address climate change—the so-called transition risks. The emergence of these risks challenges one of the financial sector’s most essential functions—ensuring that risk is borne by investors and institutions well placed to manage it.”

“President Biden has recognized that this is a major problem that needs to be tackled now,” she continued. “He recently signed an Executive Order on climate-related financial risk, outlining a whole-of-government process to assess climate risk to the U.S. financial system and federal government. As part of this process, the Financial Stability Oversight Council (FSOC), which I chair, will assess the potential risk that climate change may pose to the financial stability of the United States.”

The Biden administration urged the FSOC to look to improve disclosures, and to further the disclosure of climate-related financial risks. Yellen said this will complement the work of the Securities and Exchange Commission (SEC), which is “currently reviewing existing guidance on climate-related disclosures.”

Alternatively, some banking executives are concerned that the push for advanced disclosure encourages more regulatory oversight, which will make it more difficult to make loans, and will make it more expensive overall for banks to do business.

In closing, Yellen noted that she was pleased Treasury is co-chairing the newly reestablished G20 Sustainable Finance Working Group.

“In addition to developing a roadmap that will guide G20 priorities for scaling up sustainable finance, [the Working Group] will also focus on three topics,” she said. “First, it will consider how to improve existing international initiatives and approaches to sustainability disclosure and reporting. Second, the Working Group will explore the various tools and approaches used by jurisdictions and the private sector to align finance with climate and sustainability goals and develop recommendations to enhance how they work together. Lastly, the Working Group will help support MDB efforts to align their financing with the goals of the Paris Agreement.”

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