Part of the interest in a recent report on Managing Climate Risk in the U.S. Financial System is that it happened at all.  It is the product of the Climate-Related Market Risk Subcommittee, of the Market Risk Advisory Committee, of the U.S. Commodity Futures Trading Commission (CFTC).  The CFTC, the US commodities regulator, consists of three Republicans and two Democrats, all of whom were appointed by President Trump.  The report was commissioned, in 2019, to assess the effects of global warming on financial markets.  So the initial question is: how did it survive any scrutiny by the Trump administration, one of the most reactionary political administrations on the planet.  Perhaps it was a result of simple neglect, not an unusual happenstance in Trump world.

While the report was prepared by a subcommittee and published by the full Commission, its findings have not (as yet) been endorsed by the Commission.  While it may not receive any action from Trump’s Commission, it sits here waiting, like all of us, for Biden to replace Trump in January 2021.

In the meantime, it is worth a look to see how commodities regulators, in the US, view the realities and risks of climate breakdown.

The Report

Several basic takeaways are found in the report.  First, the report’s central message is that “U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks.”  At ii.  For those engaged with climate actions for decades, the message may seem simplistic, but in the world of financial regulators, it should raise some eyebrows.  A raised eyebrow can gather a lot of attention from others in the same field.

While not under its control, the report offers a fundamental finding that “financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions.”  Without a carbon price, there is little hope of transitioning to a net-zero emission economy.

At the same time, the report warns that carbon pricing must be carefully implemented so as not to unfairly burden low-to-moderate income households or historically marginalized communities.  Hearing language from the world of environmental justice in a report on commodities is enlightening and encouraging.

Because climate change is expected to affect many sectors and assets, even within a short time frame, we may find a sudden and disorderly repricing of assets, with ripple effects on portfolios and balance sheets.  This message should not be lost on the fossil fuel industries.

While much of the report focuses on climate impacts on the financial system as a whole, the report discusses “climate-related sub-systemic shocks” which can affect financial markets or institutions in particular sectors or regions, without threatening the stability of the system as a whole.  Affected assets would include those of community or agriculture banks or local insurance markets, the result of which could leave some communities without critical financial services.

While there are existing laws and regulations for dealing with financial climate–related risks, the field is changing fast and more tools may be necessary.  To develop such tools the financial markets will need to establish common definitions and standards for sharing of data, and protections against abuse of that sharing.  One of the tools that the report finds useful is scenario analysis, commonly relied on in climate studies.













The report includes a wide range of recommendations, many of which are technical modifications of practice in the field of financial systems to account for impacts from climate change.   Two recommendations are in effect structural more than procedural.  The first is the establishment of a price on carbon: “the single most important step to manage climate risk and drive the appropriate allocation of capital.”  At vi.

The second structural reform of the financial system is for all federal regulatory agencies to incorporate climate-related risks into their mandates and develop a strategy for integrating these risks in their work, including into their existing monitoring, research and oversight functions.

Neither of the structural reforms will be easy to implement but they send a clear signal to the regulated financial community that it is time they add risks from climate change to their portfolios.  Insurance companies, planning and military/security authorities have been doing this for years if not decades.

Climate risk stress testing and the development of standardized data for understanding and disclosing climate risk is critical for the regulator’s work.  All this material will have the distinct advantage of opening up financial benefits from the climate risks.


Having the US commodities regulators speak to the commodities and market community, and other regulators, is a major step forward for the increasingly broad reception climate breakdown has been receiving over the past decade.  In some ways it may be akin to the initial attention that the insurance markets paid to climate change in the past several decades.  Those who are responsible for pricing the impacts from climate breakdown on specific sectors of the economy, like insurance risk and commodity prices, are most helpful in developing support for political actions to avoid or mitigate those impacts.  As the report acknowledges, markets are not good at dealing with low-probability but high-impact climate risks.  Regulatory action is critical.

So having the commodities regulators acknowledge that climate breakdown presents significant risks for financial markets may be the most important message beyond any specific findings or recommendations about those risks.

Such messaging will certainly be lost in Trump world but Biden-ville will be most welcoming.



Managing Climate Risk in the U.S. Financial System:  Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission

Coral Davenport and Jeanna Smialek, “Federal Report on Finances Warns of Climate Havoc,” The New York Times (10 Sept 2020).


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