Biden to FSOC: Get to Work on Climate Change Financial Risk Now

May 21, 20121 — The Financial Stability Oversight Council got its marching orders Thursday from the Biden Administration –make climate-related financial stability and other financial risks a priority.

The Executive Order is a plan to put this in place throughout the federal government, to be led among the financial regulatory agencies by Treasury Secretary Janet Yellen, chairperson of FSOC. The approach is part of a “whole-of-government approach to Mitigating Climate-Related Financial Risk,” according to the EO.

In a statement, Yellen said she will be prioritizing this work while noting that, back in March, she had kicked off her first FSOC meeting as chair (she had been an FSOC member as Federal Reserve Board chair previously and gave a shout-out to the work the Fed is doing on climate risk) discussing climate change.

Highly-engaged FSOC members have already begun analyzing the issues within their jurisdictions, Yellen said in a statment following the climate-related financial risk EO yesterday.

The next FSOC meeting is scheduled for June 11. Although the preliminary agenda calls for the meeting includes money market mutual fund reform and the transition from LIBOR and money market mutual fund reform, climate change discussions are now a prioerity and will likely get attention.

Yellne promised yesterday that FSOC will work with its members to bolster climate-related financial disclosures and other data dources to improve measuring potential risk and exposure.

Yellen is tasked as FSOC chair under the EO with publishing a report before the end of the year on ecommendations to mitigate finanial stability risks, including in the insurance sector. In the insurance sector, FSOC has a voting independent insurance expert member, Tom Workman, and a nonvoting member, the director of the Federal Insurance Office, Steven Seitz. There are 10 voting members total. Five members who do not have a vote act in a an advisory role.

“This work will be challenging, and we cannot delay this hard work any longer,” Yellen said in her statement.

Yellen intends to increase the scope of the climate change risk assessment and mitigation efforts as part of a global effort, as well.

“I will also work to ensure that Treasury engage fully with our global partners through the G-7, G-20, and Financial Stability Board, helping to promote a strong and consistent global approach. Our pensions, our savings – our future livelihoods – depend on the financial sector to build a more sustainable and resilient economy. We all need to have the best tools and the best data to make well-informed decisions,” the Treasury secretary said.

Sen. Dianne Feinstein, D-Calif., who authored the pending  Addressing Climate Financial Risk Act, to help ability of federal regulators deal with climate change risk within the financial system, responded to the EO by noting that risks are greatly impacting the insurance sector and its customers.

“Reducing our carbon emissions is the best tool to fight climate change. But climate change is already creating a strain on our financial system. For instance, wildfires are driving up property insurance cost, making it less available. Farmers are being forced to contend with more severe droughts. And sea-level rise is undermining homes and critical infrastructure,” Feinstein said in a press release yesterday following the EO,” Feinstein stated in a press release.

Feinstein also wrote a letter to Seitz at FIO last September asking for a report on the effect the scourge of increased wildfires have and will continue to have on private insurance markets and recommendations to make the market more affordable in the face of these increased risks.

A digital review of several most recent FSOC annual reports found that climate change and severe weather like wildfires and rising sea levels were not even mentioned. When fire was discussed it was only in reference to “fire sales,” or the disorderly liquidation of assets to meet margin requirements or other urgent cash needs.

This is happening not a minute too soon said a source previously associated with FSOC. This person noted some California insurers have been at the forefront of trying to assess and mitigate climate change risk from the beginning.

In a March 2021 article for American Progress calling for a more vigorous FSOC, its associate director for economic policy Gregg Gelzinis broke down the threats: “The increase in frequency and severity of wildfires, floods, hurricanes, droughts, and other weather events will decrease the value of physical property, disrupt supply chains, compress corporate profits, drive up insurance claims and reduce the availability of insurance, and generally limit the ability of affected borrowers to repay debt,” he wrote.

“Climate-driven environmental shifts, such as rising sea-levels, will compound these impacts.” Financial institutions could then suffer massive losses, triggering further loss exposure for investors at all levels of the financial system, Gelzinis warned.

However, at the state level, some insurance commissioners have been fully engrossed in climate change issues for multiple years now.

Washington State Insurance Commissioner Mike Kreidler has held summits on the topic and devoted his department’s resources to it. The National Association of Insurance Commissioners will be hosting a panel next week as part of its annual international issues forum on climate risk and resilience. The May 26 discussion will be moderated by Andrew Mais, NAIC secretary-treasurer and Connecticut’s commissioner of insurance, who has been actively engaged on the topic. California’s insurance department has a climate change working group under Commissioner Ricardo Lara.

The NAIC has an executive level climate and resiliency task force and adopted an insurer climate risk disclosure data survey in 2010. However, in response to its latest survey released by the NAIC and its Center for Insurance Policy and Research late last November, researchers found that “few insurers” had reported changing their investment strategy in response to considerations of the impact of climate change on its investment portfolio. The NAIC has a nonvoting member on the FSOC, currently Eric Cioppa, Maine’s insurance superintendent and a recent NAIC president.

The EO also requires the national climate advisor and the director of the National Economic Council to develop, a comprehensive climate-risk strategy to zero in on any and all climate-related financial risk to government programs, assets, and liabilities. This work should be be done in 120 days, it says, and will also identify the public and private financing needed to reach economy wide net-zero emissions by 2050. The work must also advance economic opportunity for workers, especially in disadvantaged communities and communities of color.

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