The U.S. Commodity Futures Trading Commission’s (CFTC) Climate-Related Market Risk Subcommittee has issued its inaugural, comprehensive set of recommendations aimed at addressing climate risk management within the financial sector. Titled “Managing Climate Risk in the U.S. Financial System,” the report outlines 53 actionable strategies geared towards mitigating the threats posed by climate change to financial markets.
Truman Semans, CEO and chair of the OS-Climate planning team, emphasizes that the report advocates for urgent, extensive actions from regulators, financial institutions, and corporations to tackle the systemic risks that climate change introduces to the U.S. financial landscape. He notes that enhancing capital flows toward low-carbon, resilient opportunities is essential in navigating this challenge.
A significant focus of the report is the critical need for improved data collection and analytical tools to assess and manage climate-related financial risks. It highlights the ongoing inadequacies in available data, which pose substantial obstacles for stakeholders attempting to evaluate and compare financial disclosures and products effectively.
Furthermore, the report identifies a pressing challenge for regulators: striking a balance between ensuring public data transparency and safeguarding the innovations made possible by proprietary data. Although there have been strides in voluntary disclosure frameworks beyond the United States, the report points out persistent inconsistencies and a lack of international collaboration in establishing standardized methodologies.
Semans reiterates the crucial necessity for accurate and accessible climate-related data to facilitate informed decision-making among businesses and financial entities.
The report observes the limitations of conventional risk assessment methodologies when applied to the uncertainties surrounding climate change. It urges a cautious approach to modeling and managing climate-related risks, acknowledging that real-world dynamics often deviate from theoretical models. The CFTC stresses the importance of robust data and analytical frameworks to enable stakeholders to comprehend how climate risks impact financial valuations.
Additionally, the report posits that the financial sector must take an active role in mitigating climate risks rather than remaining passive. It calls on the financial community to deliver innovative solutions that direct more capital toward sustainable technologies critical to the transition towards a low-carbon economy.
The CFTC encourages financial regulators to create effective incentives and urges market participants to continuously improve their risk management processes. Ultimately, the report asserts that fundamental policy changes must originate from Congress, supported by an international framework capable of synchronizing global greenhouse gas emission reductions.
In a noteworthy acknowledgment, the report reflects on the United States’ hesitant role in these global efforts. This sentiment is echoed in a joint response from organizations such as Ceres, the Environmental Defense Fund, OS-Climate, The Nature Conservancy, and the World Resources Institute, which calls for decisive action from U.S. financial regulators to address climate risks proactively. They warn that failure to act may jeopardize the financial system’s ability to support the U.S. economy, highlighting the need for immediate engagement from regulators who already have the authority to tackle climate-related financial risks.