FSOC Identifies Climate Change as Emerging Threat to Financial Stability

Steven Lofchie Commentary by Steven Lofchie

In a report on climate-related financial risk, the Financial Stability Oversight Council ("FSOC") identified climate change as an emerging and increasing threat to U.S. financial stability. Treasury stated that the report was issued in response to Executive Order 14030 ("Climate-Related Financial Risk").

In the report, FSOC emphasized the need to coordinate among agencies and made over 30 recommendations to its members, including, among others, that they:

  • build their capacity to address climate-related financial risks through (i) increased internal expertise and (ii) understanding adverse impacts on financially vulnerable populations;

  • address climate-related data gaps, develop consistent data standards and engage in climate-related data sharing with other members;

  • enhance public climate-related disclosure, standardize data formats to facilitate comparability and specifically consider disclosure of greenhouse gas emissions; and

  • collaborate with external experts, use scenario analysis to assess climate-related financial risks and coordinate with international counterparts.

FSOC also issued a fact sheet on its response to climate-related financial risk which summarizes actions already taken by its members, including the SEC, Federal Reserve Board ("FRB"), the CTFC and the OCC.

SEC Chair Gary Gensler highlighted that the SEC is looking into (i) climate risk disclosure for public companies and (ii) updating the naming rules for funds that market themselves as "green" or "sustainable."

FRB Chair Jerome H. Powell reported that the FRB is developing a program of scenario analysis as recommended by the report, stating that the FRB will "address climate-related risks in an analytically rigorous, transparent, and collaborative way."

Treasury Secretary Janet L. Yellen stressed that this report is only the first step in addressing this "urgent priority."


As provided in Dodd-Frank Section 112, the purpose of FSOC is to "identify risks to the financial stability of the United States." While FSOC studies up on climate, FSOC ought not to lose sight of traditional financial risk concerns, including, for example, energy prices. Here are some recent links to releases by the U.S. Energy Information Administration ("EIA") concerning energy price risk on the U.S. economy: U.S. natural gas prices likely to remain elevated through the winter; EIA expects U.S. households to spend more on energy this winter; High global demand, low global supply contribute to rising U.S. propane spot prices; Pre-Labor Day retail gasoline prices at highest level since 2014; Retail gasoline prices rise in the western United States. See also, e.g., CNBC, Sharp surge in energy prices threatens economic recovery and is already slowing growth; Euronews, Energy prices are skyrocketing. It's game over for gas. There is no question that higher energy prices have a disproportionate effect on low-income communities. See, e.g., the Energy Burden Report. While climate change may be an "emerging" risk, energy price risk seems fully emerged.

In the report, FSOC does mention the reality that its focus cannot be single-minded. For example, FSOC acknowledges that regulators may "face trade-offs between climate-related" issues and "other mandated objectives." The report admits that steps advocated to manage climate risk may result in "regulated institutions limiting products and services" and could "hinder other objects related to low- and moderate-income community development." (Report at 23-24.)

The purpose of the establishment of FSOC was to identify risks that the political system missed, such as the housing boom that preceded the financial crisis. One of the reasons that the political system missed those risks is that the means to elevate the risks that created the financial crisis (e.g., easy credit mortgages) were politically popular. Might the structure of FSOC be so partisan that it is incapable of attending to both climate change and, say, energy prices as risks to the financial system?

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