Exchange-traded funds could become asset classes ‘subject to solvency considerations’ if climate change spurs financial shocks, reports warn
The climate crisis is an ’emerging threat’ to financial stability, US regulators say
The US financial watchdog group has warned that the climate crisis is an emerging threat to financial stability, even calling for the creation of a “climate risk committee” to monitor whether international institutions are responding appropriately.
In a draft of its annual report released on Friday, the Financial Stability Oversight Council (FSOC) said that the financial sector would be vulnerable if climate change spurs “financial shocks”.
It said that by 2040 “climate change is projected to become an emerging systemic risk”.
By around 2030 the threat will be a “material” one, it said.
The FSOC warned that “investments in commodities, reinsurance and other products with high carbon footprints are vulnerable”.
By 2025, it said, an average fund portfolio in the US would be 65% fossil fuels.
“The sharp rise in the carbon intensity of the [US] economy is projected to increase the impacts of climate change on the financial system,” it said.
As a result, “since climate change is the consequence of financial system-related decision-making … FSOC believes a committee, including an outside, sovereign wealth fund, should be established to monitor financial stability risks, including related to the environmental, social and governance (ESG) risks associated with the climate change crisis.”
The council could not say whether the risk or the solutions were insolvable, but said it was undertaking a new assessment to inform the climate change risk committee.
Financial services firms had greater exposure to climate-related risks, despite low per capita emissions in the US, the report said.
In relation to banks, capital and liquidity provisions in the financial system were “not adequate” and tended to suffer with slower economic growth, a jump in interest rates or market dislocations.
While there were signs that banks were taking greater steps to deal with climate risks, the panel wrote: “Banks still do not have a scalable response mechanism, and the financial sector as a whole has historically not had effective data.”
If the climate crisis worsened, the council warned that banks would suffer, although it could take decades to achieve “accurate and early” estimates of the scope and extent of climate-related risks.
“In the face of an evolving climate crisis, financial stability faces an existential threat that could sap markets of their resilience and require financial institutions to take radical and costly actions that will be ill-suited to a time of low demand,” the report said.
“Given the interconnectedness of the financial system, it is clear that investors, regulated institutions and regulators are tied inextricably to the state of the environment.”
The council added that climate finance was a vital way to capture carbon assets and provide an insurance policy against failed investments.
Its report called for closer scrutiny of investment bank $700bn credit facilities in China and India.