Public, high-quality climate-related disclosure by firms that are regulated as financial institutions or that issue securities will “better inform investments and market participants about climate-related risks to those entities,” a report issued by a joint group of regulators Thursday states.
Issued by the Financial Stability Oversight Council (FSOC) – the group that includes as members each of the federal financial institution regulators (represented by their various leaders) – the FSOC Report on Climate-Related Financial Risk asserts that climate change is an “emerging threat” to U.S. financial stability.
The report recommends that regulators incorporate climate-related risks into their regulatory and supervisory programs, determine whether new guidance or additional regulations are needed, and use scenario analysis as a tool for assessing climate-related financial risk.
Addressing climate-related risk disclosures, the FSOC recommended that regulators review existing public disclosure requirements and consider updates that would build on the work of the Task Force on Climate-Related Financial Disclosures (a group created in 2015 by the international Financial Stability Board, or FSB). Regulators should also consider whether such disclosures should include disclosures of greenhouse gases produced and financed by financial firms, the FSOC said.
“Like other risks, climate-related risks can impact the financial performance and position of companies over the short, medium, and long term,” the report states. “One of the most significant forms of public disclosure in the U.S. is that provided by publicly traded companies (public issuers). Public issuer disclosures are an important source of information in the U.S financial markets. Such disclosure, including disclosure of climate-related risks, is necessary to protect investors and maintain fair, orderly, and efficient markets, as well as facilitate capital formation.”
The report notes that financial regulators can also use the information they require through disclosures to assess the resiliency of both non-financial and financial firms to risks in the economy and the financial system. “For example, information about climate-related financial risks contained within disclosures has the potential to help prudential regulators assess threats to the safety and soundness of individual financial institutions and the financial system more broadly. Through these mechanisms, climate-related disclosures can help support financial stability,” the report states.
Related to the release of the report: Federal Reserve Board Chair Jerome H. (“Jay”) Powell said his agency is in the process of developing a “scenario analysis framework” related to climate change risk and would provide a progress update at a later time.