The writer, a Duke University professor, was a deputy US Treasury secretary and governor of the Federal Reserve
The US has long been criticised for lagging behind the rest of the world on tackling climate change. But with the Federal Reserve having recently joined other central banks to support the Paris climate goals and an engaged new administration on the horizon, 2021 could be a chance for the US to leapfrog into global leadership by embracing the potential of America’s complex financial regulatory system.
The agencies that comprise this system, and their mandates from Congress, are each different. But the existing mandates of the Fed, the Securities and Exchange Commission and others each can support a predictable transition towards a sustainable economy.
When former Bank of England governor Mark Carney warned about the financial risks of climate change in 2015, he was an outlier. Since then, central banks and financial regulators outside the US have understood the severe risks climate change poses to financial stability and are moving ahead.
The BoE promised mandatory climate-risk disclosures; Sweden’s central bank divested bonds issued by big polluters, and the European Central Bank began to demand better climate risk management from the banks it supervises. Their progress has won praise. But without all the US regulators pulling together, it does not add up to the decisive action that will be needed.
Now change is in the air. At long last, the Fed has acknowledged the risk climate change poses to financial stability and joined the Network for Greening the Financial System — the international “club” of central banks and bank supervisors working towards pre-emptive responses to the risk. And as Americans assess the fallout of the Covid-19 pandemic and other environmental disasters, their resolve to think differently about mitigating the costs is growing.
This is the time for the US to use its financial regulatory apparatus (which includes the Fed, the SEC, the Commodity Futures Trading Commission, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and others) to support and guide the market’s need for a reassessment of asset values.
In the wake of the 2008 financial crisis, the US developed new and potent monetary policies to open up new routes to credit and stabilise the financial system. When disaster loomed, we broke open the jar of untested policy interventions and tried them. Our national character is optimistic; our policymakers know how to take action.
I sit on the newly established Regenerative Crisis Response Committee, a diverse group of economic thinkers. The RCRC is filling that jar with ideas that will allow US financial agencies to lend the strength of their diverse mandates in solving overlapping economic, health and climate crises. It starts by making sure our financial markets can price in climate change risks. This means financial groups must learn to measure and disclose exposure to climate risk. Momentum is growing: this year, Bank of America, Citigroup and Morgan Stanley all committed to do so.
Next, financial supervisors will need to know how to act on this information. Supervisory adjustments will have to take climate disclosures into account and the Fed will need to use climate risk data to make decisions on asset purchases. Rating agencies will need to know what it means to incorporate climate risks, so market pricing reflects the cost of climate risk. Fiduciary duty rules, too, may need to be reimagined and accounting standards clarified.
Finally, the Fed should monitor the extent to which their purchases and programmes allocate capital to companies with promising technologies that generate demand for a durable economic recovery, rather than doubling down on harmful technologies that are destined for obsolescence. More flexible and low-cost lending to credit unions and community development financial institutions across the US would provide those most affected by climate change with access to capital to mitigate its impact.
As the world struggles to make up for its lack of preparedness for the Covid-19 pandemic, 2021 is the year to reimagine capital as a tool for accelerating and smoothing the transition to a world of net-zero carbon emissions. American monetary policy and financial regulatory policy can focus on a climate-durable recovery and the US agencies responsible for these policies can add to the early momentum of their global counterparts.