Climate groups respond to Yellen statement on FSOC and climate

In Bali last Saturday, Treasury Secretary Janet Yellen told reporters that the Financial Stability Oversight Council (FSOC) is “not really a direct tool to address climate change.” This directly contradicts earlier commitments made by Yellen and the Biden administration to address the systemic risk that climate change poses to the economy.

In May 2021, President Biden issued an Executive Order in which he stated his administration’s policy to “act to mitigate [climate-related financial risk] and its drivers” and ordered Secretary Yellen, as the chair of FSOC, to coordinate research & action by financial regulators. Secretary Yellen led the publication in October 2021 of an FSOC report on Climate-related Financial Risk and acknowledged that “climate change is an emerging and increasing threat to America’s financial system that requires action.” In her confirmation hearing, Secretary Yellen called climate change an existential threat and said, “both the impact of climate change itself and policies to address it could have major impacts, creating stranded assets, generating large changes in asset prices, credit risks, and so forth that could affect the financial system. These are very real risks.”

Member organizations of Stop the Money Pipeline coalition have gone to great lengths to spell out the steps FSOC members can take to manage climate related financial risk including in an assessment of the October 2021 FSOC climate report and a roadmap published in March 2021. The FSOC has a role in coordinating and recommending regulatory actions by member agencies, and FSOC-specific recommended actions include:

issuing guidance for conducting scenario analyses;
conducting a system wide climate stress test to evaluate whether capital surcharges, concentration and/or portfolio limits or other macroprudential stabilizers are needed;
withdrawing 2019 guidance that made designation of Systemically Important Financial Institutions more difficult; and
adopting new guidance that includes climate risk in its criteria for designating a nonbank as one such institution.

According to NOAA, “in 2022 (as of July 11), there have been 9 weather/climate disaster events with losses exceeding $1 billion each to affect the United States.” Climate-related weather disasters cost the US economy more than $145 billion in 2021 and over the last five years, they have cost $750 billion. Earlier this month, the European Central Bank’s climate stress test of 104 banks showed that 60% of the banks do not yet have a climate risk stress-testing framework.

Members of the Stop the Money Pipeline coalition released the following statements:

“FSOC was created after the last financial crisis to identify and respond to emerging threats to financial stability. When FSOC released a report in October last year about climate change, Secretary Yellen herself called climate change ‘an emerging threat to America’s financial system that requires action.’ Why is she then abdicating her duty as the convener of the FSOC to respond to what she herself has acknowledged as an emerging threat to financial stability?” said Moira Birss, Climate and Finance Director, Amazon Watch.

“There are numerous specific, tangible, and realistic actions the FSOC agencies can take to safeguard our financial system from climate risk, all of which are well within their purview. Secretary Yellen’s most recent statement directly contradicts her previous commitments, and explicitly undermines the Biden administration’s commitment to a whole-of-government approach to tackling climate change,” said Adele Shraiman, campaign representative for the Sierra Club’s Fossil-Free Finance campaign. “It’s time for financial regulators to act, and for Secretary Yellen to stop standing in the way.”

“With bold leadership, the FSOC can and must play a facilitating role to protect the economy from climate-related systemic financial risk. In banking, in markets, in municipal finance, in the insurance sector, climate risks are multiplying each and every year. The FSOC determined in October 2021 for the first time that climate change poses a systemic financial threat but it has yet to produce a comprehensive plan to adequately mitigate those risks. We need the FSOC to identify and recommend a policy pathway forward, and quickly, not throw up its hands while the planet and economy burn,” said Alex Martin, Sr. Policy Analyst at Americans for Financial Reform Education Fund. “The FSOC was created to head off financial crises, not just track their trajectory.”

The Stop the Money Pipeline coalition is a coalition of nearly 200 organizations working to hold the financial backers of climate chaos accountable.

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