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CFTC Report Warns of Systemic Risks from Climate Change

The report calls on financial regulators to move “urgently and decisively” to measure, understand, and address the risks climate change poses to the US financial system.

The CFTC (Commodity Futures Trading Commission) has released a report call for broad action to address systemic risks to the US financial system posed by climate change.

The report, entitled ‘Managing Climate Risk in the US Financial System’, is the first of-its-kind effort from a US government entity to examine the threats climate change presents to US financial stability. The effort was initiated by CFTC commissioner Rostin Behnam in June 2019.

Escalating weather events pose “significant challenges to our financial system and our ability to sustain long-term economic growth,” Behnam said, announcing the release of the report.

According to the report, climate risks may also exacerbate financial system vulnerabilities unrelated to climate change, including vulnerabilities caused by a pandemic that has stressed balance sheets, strained government budgets, and depleted household wealth.

“With this report in hand, policymakers, regulators, and stakeholders can begin the process of taking thoughtful and intentional steps toward building a climate-resilient financial system that prepares our country for the decades to come,” Benham said.

The report presents 53 recommendations to mitigate the risks to financial markets posed by climate change, covering carbon pricing, stress testing, emissions disclosures, and hedging tools, among other areas – some reaching outside the CFTC’s jurisdiction.

The “single most important step” to manage climate risk and drive the appropriate allocation of capital is for the US to set a “fair, economy-wide and effective” price on carbon, the report says.

The report also calls on financial regulators to recognise that climate change poses serious emerging risks to the US financial system, incorporate these risks into their mandates, and move “urgently and decisively” to measure, understand, and address them.

US financial regulators already have wide-ranging and flexible authorities provided under existing statutes that could be used to start addressing financial climate-related risk now, the report says.

“Financial supervisors should require bank and nonbank financial firms to address climate-related financial risks through their existing risk management frameworks in a way that is appropriately governed by corporate management,” it says.

“That includes embedding climate risk monitoring and management into the firms’ governance frameworks, including by means of clearly defined oversight responsibilities in the board of directors.”

In addition, the report calls on regulators to help promote the role of financial markets as providers of solutions to climate-related risks, also highlighting the need for financial innovation to both efficiently manage climate risk and facilitate the flow of capital to accelerate the transition to a net-zero emissions economy.

The report, available here, was prepared by a subcommittee convened by the CFTC and comprising banks, asset managers, asset owners, and leading firms in the agriculture, oil and gas sectors, among others.

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