FSOC Points to Progress on Climate Regulation; SEC and CFTC Chairs Tout Climate Initiatives
Commentary by Steven Lofchie
The Financial Stability Oversight Council ("FSOC") issued a statement highlighting progress made on climate regulation since the issuance of its October 2021 "Report on Climate-Related Financial Risk."
In the 2021 report, FSOC and its members stated it was critical to "assess climate-related risks to the financial system" and produced over 30 recommendations for U.S. financial regulators indicating "how best to identify and address" such risks. Since the issuance of that report, FSOC stated that its members have made significant strides to "address capacity building, disclosure, data, and assessment and mitigation of risks." In addition, FSOC said that it has established a new interagency committee to serve as "an active forum for interagency information sharing, coordination and capacity building."
In connection the with FSOC statement, SEC Chair Gary Gensler and CFTC Chair Rostin Behnam issued separate statements as to the climate-related initiatives of their respective agencies. Mr. Behnam reported that the CFTC issued a Request for Information on climate-related market risk, particularly as it pertains to derivatives. Mr. Gensler reported that the SEC put out a rule proposal requiring disclosure of climate-related information by public companies, as well as rules intended to prevent investment companies and investment advisers from falsely marketing themselves under ESG-related labels.
Commentary
In December of 2021, FSOC issued its Annual Report on risks to the financial system. The report said a great deal about the risks to the financial system resulting from climate change, but very little about the risks resulting from high inflation.
This calls to my mind a segment in the Mark Twain picaresque A Connecticut Yankee in King Arthur's Court, one of my favorites when I was growing up. For those who have not read it, the story is about a modern 1890s man who travels back in time to King Arthur's court in sixth century England. One of the Arthurian-era magicians has the remarkable ability to tell what the members of the English royal family are doing at every moment, even though they are hundreds of miles away. In spite of this fantastic skill, the magician is unable to tell the number of fingers that the Connecticut Yankee holds up behind his back, even though the hero is standing immediately in front of the magician. The Connecticut Yankee believes that this disparity in vision shows the magician to be a fake, but the magician's audience is untroubled because they don't care about the number of fingers being held up by the Yankee; they just want to know what the members of the royal family are doing.
If FSOC cannot see the risk of inflation - the imminent problem - how can we have confidence that FSOC has an accurate vision of climate-related financial risk, which is further off and seemingly much more difficult to assess?
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