How to deal with climate change’s increasing threat to US financial stability, in 4 charts
- Climate change could destabilize the US’ financial system if regulators and institutions don’t take a uniform approach, according to a new report.
- Implementing scenario analysis, enhancing disclosures and improving data are among the top recommendations.
Climate change is “an emerging and increasing threat” to the US’ financial system and affects the economy in a variety of direct and indirect ways, according to regulators.
“Increasing adverse effects from climate change to households, communities, and businesses will exacerbate climate-related risks to the US and global financial systems if not addressed,” said the US Financial Stability Oversight Council.
In a new report on the effects of climate change upon the US’ financial system, the FSOC detailed the climate-related risks faced by the industry and offered recommendations for regulators and financial institutions to improve resiliency.
The tools currently at hand are insufficient for proper climate-related risk assessment, it found. Investors, regulators and market participants need better data, including enhanced and transparent disclosures to create an accurate picture of financial risks posed by the changing climate.
An important recommendation was that banks and financial institutions use scenario analysis, which is similar to a stress test, to assess their risk exposure. This move is supported by the Federal Reserve, which is already undergoing such an exercise, hoping to guide other financial institutions in the future.
The effects of climate change on the financial system have been getting more attention over the past year, especially from the Biden administration. The FSOC was tasked with identifying vulnerabilities in the US financial system, and its report follows President Biden’s executive order on Climate-Related Financial Risks signed in May, aimed at mitigating economic risks to climate change.
Moreover, the adverse effects of climate change are likely to be disproportionately suffered by financially vulnerable communities, including low-income communities, communities of color, and Native-American communities. Future actions to address climate-related financial risks could negatively impact these communities through higher insurance and credit costs, the report noted.
Here are the main takeaways from the report, in four charts.
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