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U.S. Moves Forward on Financial Regulation to Mitigate Climate Risk

riesgo climático

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Regulators in the U.S. financial system are working on new regulations to manage and mitigate climate risk in an effort to incorporate risk management from rising temperatures into U.S. financial regulation.

In February, Treasury Secretary Janet Yellen established a unit within her Department to assess potential risks to the financial sector due to climate change and, in addition, to study possible tax incentives aimed at mitigating carbon emissions in the U.S. economy, headed by Sarah Bloom Raskin.

The Office of the Comptroller of the Currency —a unit of the Treasury Department charged with overseeing national banks and savings and loan institutions operating in the United States— is working on guidance for lenders to assess and mitigate potential financial risks from climate change.

climate risk
The Treasury Department, headed by Janet Yellen, studies potential climate risks for the U.S. economy. (Image: EFE)

“Climate change poses an existential risk to society and the associated financial risks pose safety and soundness risk to banks. To safeguard trust, banks and regulators must begin to take action now,” said the current Comptroller of the Currency, Michael Hsu.

For its part, the Federal Reserve (FED), headed by Jerome Powell, created two entities to incorporate climate risk into banking regulation: the Financial Stability Climate Committee, focused on establishing the regulation that will prevail for the financial system, and the Climate Oversight Committee, which will be in charge of supervising the cases of particular institutions.

The FED has also asked banks and other financial institutions to provide information on the actions they are taking to mitigate climate risks within their balance sheets.

Securities and Exchange Commission (SEC) Chairman Gary Gensler confirmed that the regulatory body is considering introducing new climate risk requirements in publicly traded companies’ annual financial performance reports.

climate risk
Under Jerome Powell, the FED has established two committees to regulate climate risk mitigation in the financial sector. (Image: EFE)

Publicly listed companies will soon have to disclose what actions to mitigate climate risk they are taking, as well as their exposure to legal, environmental and social changes stemming from climate change. “Today, investors want to understand the climate risks of the companies in which they hold shares,” Gensler said during a webinar.

Although financial regulators are making progress in establishing formal guidance for managing and assessing climate risk, much of the financial sector has already made progress on its own in assessing these risks, and from commercial banks such as Goldman Sachs to consulting firms such as Deloitte have their own guidelines for assessing the issue.

Coastal cities such as Miami, which are potentially vulnerable to climate change, have begun to develop plans to mitigate climate risk, such as large drainage systems to prevent the growing cost in material losses caused by increasingly frequent flooding.

As temperatures rise, both governments and the private sector have begun to take measures to mitigate climate risks, measures that could diametrically affect the way they do business and the future of many industries.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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