On September 9, 2020, the U.S. Commodity Futures Trading Commission (CFTC) issued a report of the climate-related market risk subcommittee. Throughout the report, the CFTC highlights the significant emphasis that must be placed on climate change, as threats related to such changes may impact U.S. financial institutions and regulators. The report is critical, as it analyzes the future needs for progression and development within financial markets, and the intersection of environmental policies and controls on those markets. By developing this report, the CFTC intended to develop recommendations for financial innovations that can help the U.S. economy better manage climate risk and direct appropriate capital into progressive technologies for the changes.
Among the many critical findings, one noteworthy issue addressed indicates that “financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if any economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions.” This finding is significant because it recommends a policy framework to incentivize effective reductions of greenhouse gas emissions. While such recommendations appear beneficial to developing innovative and long-lasting production efforts, policymakers must also be aware of the distributional impacts of carbon pricing and ensuring that the impact of such cost changes are appropriately distributed.
Another major finding recommended by the CFTC report was the potential ability of climate change to affect multiple sectors, geographies, and assets in the United States within a relatively short time frame. The report specifically highlights that financial assets are not fully reflective indicators of climate-related physical and transitional risks and that a sudden change in the market’s view of global weather changes could lead to a significant disruption in asset pricing. In addition to these concerns, the report expressed a general sentiment that U.S. financial regulators possess sufficient authority to render significant control in the oversight of systemic financial risk, risk management of particular markets and financial institutions, disclosure and investor protection, and the safeguarding of financial sector utilities. Additionally, the report discussed significant disclosures by corporations on climate-related financial risks, as those are what the CFTC consider to be “essential building blocks” to ensure that climate risks are measured and managed effectively.
While this does not highlight all of the major recommendations from the CFTC report, several recommendations were made to improve the synergistic relationship between environmental implications and financial regulations. As outlined above, the CFTC recommended a set carbon price, with a goal of reducing emissions consistent with the Paris Agreement. In addition, recommendations were made to implement information regarding climate-related financial risks into various regulations, such as the Dodd Frank Act and others. Furthermore, recommendations were made specifically regarding financial institutions and other corporations to factor climate risk into key accounting metrics to determine profitability and sustainability.
Given the recent report issued by the CFTC, it will be interesting to see the impact its recommendations and data will have on U.S. regulations. Given significant political and financial turmoil leading up to the 2020 presidential election, arguments regarding significant financial impacts related to environmental regulation will be a hot-button issue for debate.