U.S. financial regulators are gearing up to tackle climate change under President-elect Joe Biden. The industry will be ready to make sure any new rules suit them. Then the Federal Reserve revealed this week that it will join the Network for Greening the Financial System, a group of central banks working to address the risk global warming poses to their economies, some hailed the move as progressive. But the Fed is simply catching up to peers after four years of sitting out a global surge in climate finance regulation.
The NGFS already includes nearly every major economy and many regulators have moved past joining multilateral initiatives to implementing rules on their own. On Monday, U.K. companies were told that they would be forced to disclose climate-related financial risks starting 2025. New Zealand made a similar pledge in September and the European Union is more than two years into deploying a wide-ranging program of sustainable finance rules. Even Australia and Canada, which are heavily reliant on fossil fuels, are developing climate stress tests for financial institutions.
U.S. policy makers will likely have to draw on the experiences of other countries when they start building a climate-risk framework to make up for a lack of institutional knowledge. While many government agencies watched their environmental measures get rolled back during the Trump years, financial regulators never even got started because climate change was only just becoming an issue in their sphere around the time he was elected.
Their most significant action so far has been a 193-page September report from a Commodities and Futures Trading Commission subcommittee that made 53 recommendations, including mandatory climate risk disclosures, standardized definitions, and stress tests. Although the subcommittee—whose members included officials from big finance firms and big oil producers—unanimously endorsed the report, it’s hard to imagine they’ll all be implemented swiftly and without pushback from industry lobbyists.
For a preview of what’s in store, consider Europe.
Until last year, the development of climate-finance regulation was a mostly friendly affair between industry and regulators. In various countries, company representatives, non-governmental organizations and policy makers would gather at workshops and panels to wax lyrical about the importance of addressing financial climate risk. They all broadly agreed that climate change was relevant to finance, but the prospect of mandatory rules seemed distant: most measures were either completely voluntary or, at most, guidance.
Last March marked a turning point. European bureaucrats working on a system of definitions for “green” businesses were surprised at the intensity of lobbying over what seemed like a dry, technical matter. A vote on the issue expected to easily pass the European Parliament was blocked. Analysis by InfluenceMap, a London-based nonprofit, showed that U.S. firms were among those pushing for a weaker taxonomy, although the more forceful work came from industry groups. Natural gas and nuclear groups in particular ramped up lobbying on the issue, according to Reclaim Finance, a French NGO.