House and Senate Democrats have introduced a bill that would require the Financial Stability Oversight Council (FSOC) to set up an advisory committee to produce recommendations on how financial regulators should address climate risks. The Addressing Climate Financial Risk Act would also require FSOC, a systemic risk watchdog created under the Dodd-Frank Act, to explain how it will consider climate risk in determining whether to mark non-banks for additional regulatory oversight, among other provisions. PL111-203
Rep. Sean Casten of Illinois introduced the House measure (H.R. 1549) on March 3, 2021, with five Democratic cosponsors. Sen. Dianne Feinstein of California introduced the Senate version (S. 588) on March 4 with six Democratic cosponsors.
“We can’t ignore the threat climate change poses to our financial system any longer,” said Feinstein in a statement. “While we look for ways to keep reducing our carbon emissions, we must also prepare for the financial strain of climate change.”
She added that “federal financial regulators need to understand this risk and develop a plan for ways to reduce it.”
The measure comes as financial regulators are facing increasing pressure, including from Democratic lawmakers, to require public companies and other regulated entities to make more robust, more consistent disclosures on how climate change – and the more frequent extreme weather events associated with it – will affect their future financial results. Incoming SEC Chairman Gary Gensler, who has yet to be confirmed by the Senate, is expected to pay far greater attention to climate risk and other environmental, social, and governance (ESG) disclosures. And acting SEC Chair Allison Herren Lee has used her short time in the role to toughen the commission’s ESG posture, including by launching the Climate and ESG Task Force in the Division of Enforcement. (See SEC Forms Enforcement Task Force on Climate and ESG Issues in the March 5, 2021, edition of Accounting & Compliance Alert.)
Under the bill, FSOC would establish an advisory committee on climate risk made up of four climate science experts and eight “experts in climate economics or climate financial risk,” with specific members having expertise in insurance, capital markets, banking, international financial markets, and housing, according to the bill text. None of the committee’s members can be employed by a company regulated by any of FSOC’s member agencies.
Besides setting up the advisory committee, the bill requires banking regulators to update supervisory guidance on climate risk and requires the Federal Insurance Office to issue a report on insurance regulation and climate risk. Also, the FSOC’s Systemically Important Financial Institution (SIFI) designation process for insurers and other large non-bank entities would be updated to accommodate climate risk.
The Dodd-Frank Act created FSOC in the wake of the 2008 crisis to identify and mitigate systemic risks to the financial system posed by the potential failure of large financial institutions, and other large-scale problems. The panel is headed by the Treasury Secretary, and also includes the chairs of the SEC, Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and other financial regulators. Under the bill, those members agencies would also be required to “develop and make publicly available a strategy to identify and mitigate climate financial risk within” their jurisdictions.
The SEC last issued climate guidance in 2010 in Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change. In the guidance, the commission said companies should inform investors about the risks they face from climate change, including lawsuits, business problems, regulatory supervision, or international treaties. The significant effects of climate change, such as severe weather, rising sea levels, loss of farmland, and the declining availability and quality of water, have the potential to affect a public company’s operations and financial results and should be disclosed.
This article originally appeared in the March 8, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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