The Rise of Climate Consciousness at the Federal Level

Federal agencies have finally begun to sound clear, strong warnings on the risks of climate change to the US economy. In the first of a series of welcome developments illustrating this raised level of awareness of the climate crisis, September’s 196-page report from the Market Risk Advisory Committee of the Commodity Futures Trading Commission, “Managing Climate Risk in the US Financial System”, surveys the many risks to the economy that a warming world presents, with recommendations for action. The report calls for a price on carbon and elimination of fossil fuel subsidies, and recommends substantially increasing investment in transition-resilient asset classes such as clean energy.  [Divestment is relegated to a footnote on the Norges Bank.]

Earlier this month, US Federal Reserve Chairman Jerome Powell formally acknowledged the threat of climate change to the financial stability of the US economy, calling for better reporting by companies and hinting that banks should also be taking climate change into account in their risk assessments and financing decisions. Fed Governor Lael Brainard, whose name was discussed as a possible pick for Secretary of the Treasury in the Biden administration, remarked that “A lack of clarity about true exposures to specific climate risks for real and financial assets, coupled with differing assessments about the sizes and timing of these risks, can create vulnerabilities to abrupt repricing events.” (think stranded assets, producing a Wiley Coyote effect on fossil fuel share prices).

Then, in mid-November, two progressive members of Congress put forward bills asking the US government’s pension system (the Federal Thrift Investment Board) to respond to the risks posed by climate change. The RESPOND Act (Restructuring Environmentally Sound Pensions in Order to Negate Disaster) was introduced by Representatives Emanuel Cleaver, II (D-MO) and Rashida Tlaib (D-MI). This important legislation addresses climate risk in two steps: first, analyze the climate-related financial risks in the investments of the Federal retirement system, and second, based on the findings, transition to low-carbon investments to protect Federal pensions from the near-term risks posed by climate change. The analysis would entail, among other things, an advisory panel and a Federal audit of the climate-related risks to the American economy.

The FTIB manages the retirement benefits of 5.5 million federal employees with approximately $558 billion in assets, and is the largest defined contribution plan in the world.

Rep. Tlaib also introduced the Retirement Investments for a Sustainable Economy (RISE) Act of 2020 (H.R. 8806), which would offer a Climate Choice investment option for the TSP, giving Federal employees the ability to select a lower-carbon investment option for their retirement savings. The RISE Act is companion legislation to a Senate bill introduced last year by Senator Jeff Merkley (D-OR).

As SEC Commissioner  Allison Herren Lee said in a recent speech titled “Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation”: “There is a growing consensus that climate change may present a systemic risk to financial markets.” She asserts that regulators such as the SEC “must ensure that we work with fellow regulators to understand and, where appropriate, address systemic risks to our economy posed by climate change.”