Washington, D.C. — As the incidence of catastrophic weather events and other devastating environmental changes caused by climate change continues to rise, so do estimates of the economic price of managing the effects of the crisis. One estimate suggests that global economic losses stemming from climate change could surpass $23 trillion per year—far exceeding the cost of the Great Recession.
A new brief from the Center for American Progress details the potential risks that climate change could cause for the global financial system and looks at the role that financial regulators can play in mitigating these effects.
The chief ways climate change could affect the global financial system include:
- Physical risks: Both the insurance and banking industries face direct exposure to the effects of severe weather and changing environments. The insurance industry is exposed because it must guarantee losses on physical assets harmed by severe weather. The banking system is also highly exposed because mortgages, commercial and agricultural loans, and other assets on bank balance sheets are susceptible to losses related to severe weather and environmental changes.
- Transition risks due to rapid change to a greener economy: The policy decisions or technological innovations necessary to transition to a greener economy could strand assets in the fossil fuel sector and decrease the value of other assets sensitive to the price of carbon. This price shock could lead to abrupt losses at financial institutions and ripple across the financial system.
Recommendations to protect the economy from climate change include:
- The Federal Reserve should join the Network for Greening the Financial System, the international group of central banks and financial regulators working to mitigate the effects of climate change to the financial system.
- The Financial Stability Oversight Council should direct the U.S. Department of the Treasury’s Office of Financial Research to coordinate with member agencies on increasing interagency resources devoted to analyzing climate-related threats to the financial system.
- The Securities and Exchange Commission should require public companies to disclose information on the risks that climate change poses to their businesses.
- The Fed should establish climate change stress tests to help ensure that large financial institutions are resilient to severely adverse climate scenarios.
“The risks that climate change poses to the global financial system can not be overstated. Waiting to act only increases the probability that a climate shock will destabilize the entire economy,” said Gregg Gelzinis, policy analyst for Economic Policy at the Center for American Progress and one of the report’s co-authors. “The United States is far behind other nations when it comes to mitigating the effects of climate change on the global economy. Climate change falls squarely within the jurisdiction of financial regulators. Not acting to build a 100 percent clean future would be clear negligence.”
“Every day, Wall Street funnels billions of dollars of our hard-earned savings into dirty businesses such as fossil fuels and commodities companies,” said Graham Steele, director of the Corporations and Society Initiative at Stanford Graduate School of Business and co-author of the report. “By failing to properly account for the true financial risks of climate change, our financial watchdogs are subsidizing a potential climate crisis. Effective regulation of climate risk is critical to protect the retirement security of regular folks and an essential component of the successful transition to a green economy.”
Read: “Climate Change Threatens the Stability of the Financial System” by Gregg Gelzinis and Graham Steele
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