By Yevgeny Shrago
With little fanfare, the Senate voted today to confirm a key member of President Joe Biden’s economic team: Nellie Liang as Undersecretary of the Treasury for Domestic Finance. Though the nomination has largely flown under the radar, Liang has been playing a key role in the Treasury Department for several months and now undertakes a crucial role in Treasury’s efforts on protecting the economy and financial system from climate change.
Among Liang’s most important roles on climate change is managing the Financial Stability Oversight Council (FSOC or Council), a watchdog tasked with preventing the regulatory gaps and failures like the ones that caused the 2008 financial crisis. A May 20 Executive Order on Climate-Related Financial Risk directed Secretary Janet Yellen, as chair of the Council, to issue a comprehensive report on what financial regulators can do to reduce the threat of climate change to the financial system. With the Council’s permanent staff under her supervision, Liang’s mark will undoubtedly be on the report. Although Yellen is ultimately accountable for its contents, it will be up to Liang and her staff to identify and elevate the bold actions that regulators need to take.
To have its proper effect, the report needs to bluntly discuss where we are now. Regulators and banks talk a lot about climate risk, but they treat it as an abstract concept to be analyzed and modeled. But climate change is here, and its effects are becoming ever more damaging. Banks are still gorging themselves on fossil fuels, even as global policy commitments increase the risk that those assets become worthless sooner rather than later. No one is doing enough to stop the financial system from either taking on climate risk or creating it for the rest of the economy. Without rapid intervention by regulators, banks are creating the conditions for another 2008-style crash. That can’t happen if the Biden administration wants to make good on its commitment to cut U.S. emissions in half by 2030 in a way that remedies racial and economic inequality.
Given these challenges, the report also needs to embrace the full range of solutions available to regulators today. The SEC must keep moving forward on developing disclosure requirements that illuminate which companies contribute the most to climate change. Banking regulators need to use all of their tools to keep banks from overdoing it on climate risk, from supervisory expectations to stress tests and capital requirements, to outright limits on risky assets and activities. And the FSOC staff needs to be on the lookout for insurance companies, asset managers, and private equity firms that take on and create climate risk without meaningful oversight. Pulling these institutions into the regulatory regime is one of FSOC’s key tools for preventing new financial crises.
To help Yellen and Liang pull off this report in the next 120-something days, the Biden administration should give them some help. Important roles like Comptroller of the Currency, a tiebreaking vote on the Commodities Futures Trading Commission, and Assistant Secretary for Financial Institutions (a direct report to Liang) are all vacant. Others, like the director of the Office of Financial Research and the independent member with insurance expertise on the FSOC, are still held by uncooperative Trump holdovers. Liang should push Yellen and the White House to give her the support she needs by filling these roles with champions for climate change, financial regulation and racial and economic justice.
There’s a lot to do, and time is ticking. Liang’s confirmation may have been a quiet insider affair, but if she and Yellen don’t deliver on this report, the lights on their job performance will get a lot brighter.