It's Not Just the Climate That's Heating Up

Federal regulatory attention to climate risk is heating up.  As predicted, under the Biden administration, every federal agency is becoming  climate-conscious, and we are seeing this happen in real time. Recently, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have signaled that they will be devoting significant time and resources to ensuring that the financial industry adequately accounts for climate risk.

CFTC Establishes a Climate Risk Unit

Last week, Rostin Behnam, acting chairman of the CFTC, announced that he would be establishing a Climate Risk Unit to concentrate on the role of complex financial derivatives in climate-related risks during the transition to a low carbon economy. This establishment is the latest in a series of steps that Behnam has taken to address climate-related risks to the financial system. The unit will work to enact recommendations made in a September 2020 CFTC report titled Managing Climate Risk in the U.S. Financial System. 

SEC Welcomes Input on Climate Change Disclosures

The CFTC’s announcement follows closely on the heels of the SEC’s request for public input from market participants regarding “whether climate change disclosures adequately inform investors about known material risks, uncertainties, impacts, and opportunities.” The SEC is specifically interested in how disclosures can provide “consistent, comparable, and reliable information” and clarity to registrants regarding expectations. The SEC is also asking for input on the relative advantages and disadvantages of the wide range of available frameworks and standards to measure climate-related risk in addition to other environmental, sustainability, and governance (ESG) factors.

While the agency works to determine a future path, climate risk will not fall by the wayside. The SEC has also commissioned a Climate and ESG Task Force that will be taking the lead in investigating inadequate disclosures of climate risk under the current disclosure rules. As climate change-related events continue to be a substantial burden on the US economy (at the hefty price tag of $95 billion in 2020), these actions are just another indication that under the Biden administration, agencies are working to ensure that the US financial system can stand up to climate change.