Accelerating Decarbonization in the United States Technology, Policy, and Societal Dimensions (2024) / Chapter Skim
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11 Aligning the Financial Sector and Capital Markets with the Energy Transition
11 Aligning the Financial Sector and Capital Markets with the Energy Transition
Pages 590-620
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From page 590... ...
Improved and standardized data collection and disclosure encourages improved risk management, facilitates the pricing of climate risk into asset values, and directs capital flows in ways that are then sensitive to climate risks. Last, financial regulators need to improve their monitoring and supervision of climate risks.
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From page 591... ...
As a starting point, however, the chapter's introduction explains why the committee has included a discussion of this sector in its report. Clearly, the financial decisions of investors, companies, households, and governments to invest in either conventional, GHG-emitting capital and goods and services with high embedded GHG emissions (Scope 3 emissions)
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From page 592... ...
• Direct the Federal Reserve System to identify climate-related financial risks, including by applying climate change policy and impact scenarios to financial stress tests. 592 A00026 -- Accelerating Decarbonization in the United States_CH11.indd 592 3/30/24 3:10 PM
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. to ensure that climate risk is better reflected in the com mission's and other federal financial agencies' oversight of commodities and derivative markets" (NASEM 2021, p.
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From page 594... ...
. RECENT LEGISLATIVE, REGULATORY, OTHER POLICY, AND NON-GOVERNMENTAL ACTIONS RELATED TO THE FINANCIAL SECTOR Since early 2021, the federal government has initiated action on the two topics where the committee recommended policy change: requirements for public companies to disclose climate risk and inclusion of climate risk into financial-sector risk assessments; and the seed funding for a new national Green Bank.
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. Building on this report, the Financial Stability Oversight 2 "Indirect investment" relates to the provision of "funding and technical assistance to establish new or support existing public, quasi-public, not-for-profit, or nonprofit entities that provide financial assistance to qualified projects at the State, local, territorial, or Tribal level in the District of Columbia, including com munity- and low-income-focused lenders and capital providers" (IRA §60103)
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.6 Furthermore, the proposed rule would require companies to disclose their GHG emissions, with the SEC's intention that providing such "GHG emissions disclosures would provide investors with decision-useful information to assess a registrant's 4 FSOC is comprised of members from various federal agencies (i.e., the Department of the Treasury, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Consumer Finance Protection Board, SEC, CFTC, the Federal Deposit Insurance Corporation [FDIC] , FHFA, and the National Credit Union Administration)
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. In January 2023, the Federal Reserve announced a pilot "Climate Scenario Analysis" exercise for the na tion's six largest banks, in order to "learn about large banking organizations' climate risk management practices and challenges and to enhance the ability of both large banking organizations and supervisors to identify, measure, monitor, and manage climate related financial risks" (i.e., physical risks and transition risks on the banks' loan portfolios)
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8 Note that the Federal Reserve's Chair Jerome Powell explained as recently as January 2023 that the Federal Reserve's role in climate policy is extremely narrow -- to ensure that financial institutions are ap propriately managing their own climate-related risks (Newburger 2023)
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From page 599... ...
2022) stemming, at least in part, from political polarization around the concept, the broad expectation is that investors will continue to press companies to incorporate ESG principles, including climate risks and opportunities, into their strategies (Atkins 2020; Barclays 2022; Berlin 2022)
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From page 600... ...
The principal impediments are structural barriers that prevent many consumers from accessing the capital needed to buy and/or invest in low-carbon goods and services; persistent in formation gaps that enable decision makers to make better choices that take climate related risks into account; and steps by financial-sector regulators to ensure adequate ongoing awareness of and ability to take action to address any adverse impacts of climate risks on financial stability. Consumers' Access to Capital Federal tax credits11 and other state/federal programs12 create financial incentives for many households and businesses to purchase and install energy-efficient and low-carbon solar systems, electric vehicles, and other home products and services.
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2) 13 There have been efforts by federal financial regulators (e.g., Federal Reserve Board, CFPB, FHFA)
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(See the discussion of the national Green Bank and EPA's GHG Reduction Fund, in the section "Federal Legislative Action" above.) Finding 11-2: The financial sector is an important component of a just and equi table transition to a net-zero economy, because of both the financial resources and redirection required and the potential risks to the broader financial system.
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c. Congress should conduct hearings and support research and convenings at key consumer finance institutions -- including the Consumer Financial Protection Bureau, the Federal Reserve Bank, and the Federal Housing Finance Agency -- to explore how they may expand private lenders' reporting requirements regarding the energy consumption of the goods or services being financed (e.g., the mortgaged home or the auto loan)
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, DOE (e.g., its Energy Efficiency and Conservation Block Grant Program) , EPA (e.g., its GHG Reduction Fund)
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From page 605... ...
, the Department of Energy (e.g., its Energy Efficiency and Conservation Block Grant Program) , the Environmental Protection Agency (e.g., its GHG Reduction Fund)
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Another set of challenges involves data gaps. For example, current collection of financial data associated with corporate loans may not include important details associated with climate-related risks, such as emissions-related information that may inform transition risks and detailed geographic information on production facilities that could inform exposure of such loans to physical climate risks.
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From page 607... ...
The 2021 FSOC report included numerous recommendations about how to fill these climate-related data and methodological gaps. These rec ommendations were that FSOC member agencies: • "Promptly identify and take the appropriate next steps toward ensuring that they have consistent and reliable data to assist in assessing climate-related risks; • Use existing authorities to implement appropriate data- and information sharing arrangements to facilitate the sharing of climate-related data across FSOC members and non-FSOC member agencies to assess climate-related financial risk, consistent with data confidentiality requirements; • Coordinate efforts, as appropriate, to address data gaps, including prioritizing data sets and coordinating data acquisition, in order to avoid duplication of effort and facilitate the improvement and coordinated use of data and models across FSOC members; • Move expeditiously to develop consistent data standards, definitions, and relevant metrics, where possible and appropriate, to facilitate common 607 A00026 -- Accelerating Decarbonization in the United States_CH11.indd 607 3/30/24 3:10 PM
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From page 608... ...
As the energy transition proceeds and the effects of climate change become more immediate, investors may demand compensation for holding climate risk, and look to hedge this risk by reducing exposure and increasing the required return. There is documented evidence of climate regulatory risks causally affecting bond credit ratings and yield spreads (Seltzer et al.
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The other two discussed here -- climate risk monitoring/supervision and capital requirements for banks -- focus more on the overall performance of financial markets themselves. Standardized Scoring of Climate-Friendly Activities While mandatory information disclosure standardizes the information presented by firms subject to financial regulation, this policy does not attempt to digest that infor mation into any kind of standard investment guidance.
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suggested a standardized taxonomy for climate risks but not this type of "score" for economic activities. 610 A00026 -- Accelerating Decarbonization in the United States_CH11.indd 610 3/30/24 3:10 PM
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federal government should establish standards for GHG emission offsets used in the voluntary market. Currently, a number of third party standards have emerged for rating offsets, and several have announced recent efforts to strengthen integrity (Integrity Council for the Voluntary Carbon Market 2022)
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and location, monitoring/ reporting/verification methodologies and third-party certification, tracking and registry information, and cost or price paid. Climate Risk Monitoring and Supervision A different arena of potential policy and regulation is related to systemic risks to the financial system posed by both climate impacts and mitigation action.
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From page 613... ...
In particular, the Federal Reserve should build on its current pilot efforts to conduct and test scenario analysis to incorporate climate risks in their regu lar stress testing of large financial institutions. Capital Requirements for Banks A step beyond monitoring and supervision would be to consider changes in regula tors' determinations relating to capital requirements for banks.
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From page 614... ...
This would inevitably exacerbate climate risks to society through financial market channels and are not consistent with timely and efficient decarbonization efforts. Finding 11-6: Federal regulators charged with supervising the financial sector cur rently have the ability to exercise their responsibilities in ways that inform inves tors about climate-related risks of firms' activities and that assess financial markets' vulnerability to climate risks.
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Objective(s) Categories Short-Form Implementing Addressed by Addressed by Addressed by Recommendation Recommendation Recommendation Recommendation Recommendation 11-1: Expand and Congress and the • Buildings • Equity Ensuring Extend Funding Environmental • Transportation Procedural Equity and Financing Protection Agency • Finance in Planning Assistance for • Non-federal and Siting New Actions Benefiting actors Infrastructure and Low-Income and Programs Disadvantaged Reforming Households and Financial Markets Communities 11-2: Disclose Office of • Electricity • Equity Ensuring Equity Indicators Management and • Buildings Procedural Equity in for Federal Budget • Transportation Planning and Siting Funding of Clean • Finance New Infrastructure Energy • Non-federal and Programs actors Reforming Financial Markets 11-3: Address Treasury Advisory • Finance • Equity Ensuring Limited Access Group on Racial Procedural Equity Faced by Low- Equity in Planning Income and and Siting New Marginalized Infrastructure and Households Programs Reforming Financial Markets 11-4: Fill Gaps in Federal agency • Finance Rigorous and Federal Financial decision makers Transparent Risk Data and that are members Analysis and Information of the Financial Reporting Collection Rules Stability Oversight for Adaptive Council (FSOC)
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From page 616... ...
Objective(s) Categories Short-Form Implementing Addressed by Addressed by Addressed by Recommendation Recommendation Recommendation Recommendation Recommendation 11-5: Strengthen Securities and • Finance Rigorous and Climate Disclosure Exchange • Non-federal Transparent Rules and Commission actors Analysis and Standardize Data and Commodity Reporting and Methods Futures Trading for Adaptive Commission Management Reforming Financial Markets 11-6: Implement FSOC members • Finance Reforming Financial Stability and the Federal Financial Markets Oversight Council Reserve Recommendations to Ensure the Stability of U.S.
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From page 617... ...
2018. "Lack of Access to Financial Services Impedes Economic Mobility." Federal Reserve Bank of Atlanta.
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From page 618... ...
2023a. "Federal Reserve Board Provides Additional Details on How Its Pilot Climate Scenario Analysis Exercise Will Be Conducted and the Information on Risk Management Practices That Will Be Gathered Over the Course of the Exercise." January 17, 2023.
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2022. "Sustainable Affordable Housing: Strategies for Financing an Inclusive Energy Transition." Federal Reserve Bank of New York.
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Washington, DC: Board of Governors of the Federal Reserve System. https:// doi.org/10.17016/FEDS.2022.066.
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