The stability of our whole economy is threatened by the climate problem. And things will only worsen. Climate consequences are clear, they cost more money every year, and they may cause an economic meltdown. Examples include the record-breaking flames devouring the west and the torrential downpours flooding the New York City subway.
Climate change is real
However, Wall Street still funds climate change. Big banks and financial organizations are investing more and larger sums of money in fossil fuel projects and businesses despite the growing effects of the climate issue. The top 60 banks in the world have invested an extra $3.8 trillion in fossil fuels since the Paris Climate Agreement was ratified in 2015. Banks are keeping the oxygen spigots wide open because, in the words of Bill McKibben, “Money is the oxygen on which the fire of global warming flames.”
Thankfully, the Biden administration is handling the climate catastrophe on a whole-of-government level. ICMA says Federal financial regulators must be involved in this strategy and use their power to limit the harm that Wall Street is producing and reduce the danger that climate change threatens to our economy.
The Wall Street-Funded Climate Crisis Is Endangering the Stability of Our Financial System, which is the Problem
How can climate change create an impact on the financial market?
The integrity of our financial system, which includes the institutions where we trade money, and consequently our whole economy, is significantly at danger due to the growing effects of climate change. According to a recent research, unmanaged climate change would cause an 11–14% decline in world economic production by 2050, or around $23T annually. The financial industry is significantly at risk from climate change in two ways:
Physical risk: With a hotter and more unstable climate, droughts reduce agricultural yields, making it harder for farmers to repay their debts; fires burn houses, erasing the value of real estate; and floods smother towns, halting economic activity in whole areas. Physical hazards are these direct dangers to our systems and structures.
Transition risk: Businesses that are largely dependent on investments in fossil fuels may face difficulties if inherent economic shifts related with the necessary transition from an economy based on fossil fuels to one fueled instead by renewable energy are not appropriately handled. The value of whole commodity classes falling in price may upset the financial system. “Transition hazards” are those dangers.
Experts have cautioned that if these concerns are not addressed, we might enter a recession “like we’ve never seen before.” Low-income and communities of color, who are most exposed to climate calamity, most financially sensitive to its effects, and most likely to experience long-term effects from an economic downturn, will bear the brunt of these costs in the absence of governmental action.
Federal regulators offering assistance
The Biden administration can assist, fortunately. The Dodd-Frank Wall Street Reform and Consumer Protection Act, sometimes known as “Dodd-Frank,” was approved by Congress in the aftermath of the 2008 financial crisis with the aim of assisting federal regulators in averting another financial crisis. Congress gave regulators permission to take action against newly developing problems in the measure. The mother of all new problems is climate change. Additionally, the measure gives regulatory agencies a lot of latitude in determining how best to manage these risks.
Now it is up to President Biden and his administration to use this power to safeguard our neighborhoods and economy from the dangerous actions of Wall Street. In fact, American banks JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America have been the leading financiers of fossil fuels in the years after the signing of the Paris Agreement, proving that the private sector is not operating independently. So, in order to preserve the stability of our financial system, federal authorities must now act in accordance with what Congress intended and limit this risk.
Which Federal Agencies Can Assist: Several federal agencies can assist. The “Financial Stability Oversight Council” (also known as FSOC) was specifically established by Dodd-Frank and is made up of the Department of the Treasury and several independent federal agencies, including: the Federal Reserve, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Federal Housing Finance Agency, and the Nationwide Insurance A significant part will probably also be played by the Department of Labor. To detect and reduce financial risk associated to climate change, each of these agencies must evaluate the instruments at their disposal.
What Resources Can Agencies Use to Reduce Financial Risk Related to Climate Change
Agencies have access to numerous types of tools. Agency actions include requiring businesses to publicly disclose information about their own climate risk, updating regulations to allow financial actors to consider climate change in their decision-making, requiring financial institutions to incorporate climate assessments into internal planning processes, ensuring that banks with significant exposure to fossil fuels have the resources necessary to manage the risks, limiting the maximum amount of exposure that any one institution may have to fossil fuels, and more.
For instance, the Securities and Exchange Commission (SEC) has already started the process of mandating publicly listed corporations to publish information about themselves relating to the climate so that investors may decide how much risk they desire to take on. Companies should be required under the regulation they propose to report the greenhouse pollution they directly produce (referred to as Scope 1 emissions), the pollution from the electricity they buy (known as Scope 2 emissions), and the pollution they finance.
The Department of Labor may also contribute by revising its environmental, social, and governance (ESG) recommendations to make sure that climate risk can be taken into account when choosing pension plans for workers.
Final words
Now you know how climate change would create an impact on financial markets. Each agency will have a unique collection of resources available to assist bank management, shareholders, and investors evaluate and manage climate risk. However, we must use all available tools immediately.
