The U.S. Financial Stability Oversight Council (FSOC) announced the release of a new report identifying climate change as an emerging and increasing threat to the U.S.’ financial stability, and calling on federal agencies to take action to address the threat, including developing climate data and enhancing climate-related company disclosure.

FSOC’ mandate is to identify risks and respond to emerging threats to financial stability in the U.S. The council is chaired by the Secretary of the Treasury, and brings together federal financial regulators, state regulators and insurance experts. Members include the heads of the Federal Reserve, SEC, Federal Deposit Insurance Corporation, and Federal Housing Finance Agency, among others.

The council’s key recommendations for government agencies to address the emerging risk include using scenario analysis to assess climate-related financial risks to financial stability, evaluating the need for new regulations to account for these risks, and enhancing climate-related disclosure to give investors the ability to make more informed decisions and regulators and financial institutions the ability to assess and manage risk. The report also calls on members to enhance climate-related data to allow better risk measurement by regulators and the private sector, and to build capacity and expertise to ensure that climate-related financial risks are identified and managed.

The report follows an executive order signed by President Biden in May, aimed at helping the federal government to address the climate crisis and mitigate the economic risks of climate change. Among the actions mandated by the order was a call on financial regulators to assess climate related financial risks, specifically encouraging Secretary of the Treasury Janet Yellen to consider plans to improve climate-related disclosures, and to incorporate climate-related financial risk into regulatory and supervisory practices.

Yellen said:

“Climate change is an emerging and increasing threat to America’s financial system that requires action. FSOC’s report and recommendations represent an important first step towards making our financial system more resilient to the threat of climate change.  These measures will support the Administration’s urgent, whole-of-government effort on climate change and help the financial system support an orderly, economy-wide transition toward the goal of net-zero emissions.”

The U.S. appears to be getting closer to a more comprehensive – and likely mandatory – system of corporate climate disclosure. In February 2021, the SEC initiated a review of the commission’s guidance for public company obligations for disclosures related to climate change risk, citing increased demand by investors for material, comprehensive and consistent information. In July, SEC Chair Gary Gensler announced that the commission is aiming to have proposed rules in place for mandatory climate risk reporting by companies by the end of this year.

In a statement before FSOC, Gensler said that the SEC is working on two climate risk disclosure projects, one focused on public companies, and the other on investment funds to enhance the reporting requirements for funds marketing themselves with labels such as “sustainable” or “green.”

Gensler said:

“For the past 80 years, the SEC has had rules to govern the naming of funds. I think we ought to consider updating those naming rules and enhancing disclosures so that investors can see what data, methodologies, and criteria stand behind these names and claims.”

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