By Yevgeny Shrago
The recent Intergovernmental Panel on Climate Change report has made it absolutely clear that both financial institutions and their regulators need to rapidly shift away from fossil fuels to avoid climate catastrophe. A new letter from the Department of the Treasury doesn’t do enough to demonstrate the agency’s grasp of this imperative. The letter, which responds to an inquiry from three Senators, acknowledges the need for urgent action, but the lack of specifics leaves much to be desired. Hopefully, Treasury is keeping its powder dry for its upcoming November report, and not giving in to fossil fuel and Wall Street interests that seek to extract a few more good quarters before the planet lights on fire.
What’s Treasury’s role on climate?
At her confirmation hearing, Treasury Secretary Janet Yellen committed to create a climate hub at Treasury as part of President Biden’s whole of government response to the climate crisis. After months of delay, Yellen selected John Morton as Climate Counselor to lead the hub. Morton’s lack of financial regulatory experience raised concerns given the important role that financial regulators must play in addressing threats from the climate crisis.
In May, the administration took another step forward when it released an Executive Order on Climate-Related Financial Risk. The order put Secretary Yellen front and center, directing her, as Chair of the Financial Stability Oversight Council, to issue a report on actions that the financial regulators who make up the Council could take to reduce climate risks to financial stability. Public Citizen has repeatedly called on Secretary Yellen and her team to issue a report that appreciates the urgency of the climate crisis and the bold action financial regulators must take to address it.
Last month,Senators Elizabeth Warren, Kristen Gillibrand, and Chris Van Hollen wrote to Counselor Morton asking for a thorough accounting of the climate hub’s work 3 months into Counselor Morton’s tenure, emphasizing his role in the Treasury report.
What does Treasury’s reply say?
Not much, unfortunately. Treasury’s reply describes the Climate Hub as focused on guiding private and public financial flows towards climate mitigation and adaptation. It does not discuss any efforts to direct funding away from fossil fuels in the United States. This is troubling because both the International Energy Agency and the UN Secretary General have unequivocally stated that new fossil fuel development is not compatible with meeting global climate targets of 1.5°C. But according to the Rainforest Action Network, United States megabanks have financed over $3.8 trillion in fossil fuel development since the Paris agreement. Treasury must take an active role in encouraging banks to reverse this destructive practice.
On the contents of the Treasury report, the letter says little, and what it does lay out isn’t strong enough. The only concrete policy the letter highlights is Treasury’s focus on developing climate-related financial disclosures. Disclosure certainly matters for reducing climate risks in the financial system, and there’s plenty for the Securities and Exchange Commission to consider as it moves toward a new climate disclosure rule. But it won’t be enough. If this is the best foot forward for congressional oversight, it presages a weak report.
If you squint, you can find some cause for optimism in the letter. It acknowledges that “we should consider all possible paths to making inroads into greenhouse gas mitigation” (emphasis added) and that accomplishing this goal will require “updated supervisory and regulatory approaches.” If that’s a serious commitment, we have a roadmap they can follow to get there.
The letter’s language suggests the report will be a collaboration of FSOC member agencies. While all should provide input, Treasury must set the policy agenda, not seek a watered-down consensus from Trump appointees Jerome Powell and Jelena McWilliams, who have dragged their feet on climate action, or acting agency heads, who may be reluctant to commit their Senate-confirmed successors. Given that the recommendations of this report will outlast most of the individual members, it’s imperative that Secretary Yellen write a report in line with the Biden administration’s commitment to aggressive emission reductions.
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The science is clear: this is the planet’s last chance to avoid climate catastrophe, and the financial system will be central to the transition to a zero emissions economy. History won’t judge Secretary Yellen favorably for writing a consensus report with Trump appointees or garnering Wall Street plaudits. It will remember only how well she rises to the challenge of steering the financial system away from its self-destructive course and toward a fossil-free future.