Climate Change Poses A Clear And Present ‘Systemic Risk’ To The Economy

Eroding U.S. leadership in the global fight against climate change is reflected rather depressingly in financial regulators’ inexplicable lag against international peers on attempting to get a handle on the matter.

This week though, there was progress. The Federal Reserve finally joined the Networkd for Greening the Financial System, a consortium of central banks focused on climate and the environment.

Fed Governor Lael Brainard on Friday laid out the case for why the issues fall well within the central bank’s policy mettle of financial oversight and risk assessment.

“We are already seeing elevated financial losses associated with an increased frequency and intensity of extreme weather events,” Brainard told a Brookings Institution webinar.

“Average annual insured weather-related catastrophe losses have increased over the past decade,” she added. “With losses increasing, insurers are incorporating the impact of climate change into their underwriting assumptions, pricing, and investment decisions.”

SEC Commissioner Allison Herren Lee spoke in even stronger terms.

“We’re seeing a growing recognition of the systemic risk that climate change poses,” she said during a panel at the same Brookings conference.


“There’s evidence that climate risks are currently not well understood and are underpriced, particularly with respect to long dated assets—utilities, commercial mortgage backed securities, potentially municipal bonds, among many others,” she said.

“We all know that underpricing can lead to abrupt and disruptive repricing as markets discover the anomaly. We may see cascading events that could trigger significant disruptive repricing.”

Herren Lee also made one key point that Brainard’s speech, which never mentioned fossil fuels, neglected: “It’s important to focus on financial institutions and their financing of carbon-producing activites.”

A report from the Rainforest Action Network earlier this year showed 35 major global banks pouring some $2.7 trillion into fossil-fuel investments in the four years following the 2015 signing of the Paris Climate agreement.

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