Climate Change Threatens the Stability of the Financial System

According to the Intergovernmental Panel on Climate Change (IPCC), humans have already caused the planet to warm by 1 degree Celsius above preindustrial levels.¹ Catastrophic floods, droughts, wildfires, and storms are becoming all-too-regular occurrences, and there is overwhelming scientific evidence that paints a clear and devastating picture of the changing climate.² Under current projections, the overall social, environmental, and economic impacts of climate change could rise to catastrophic levels.³ One estimate suggests that if temperatures rise to 4 degrees Celsius above preindustrial levels over the next 80 years, global economic losses could mount to $23 trillion per year—permanent damage that would far eclipse the scale of the 2007-2008 financial crisis.⁴ The speed and magnitude of actions taken to limit carbon emissions will determine how much these impacts can be mitigated over the coming decades.

This is an all-hands-on-deck moment. It is incumbent on policymakers across the issue spectrum—from energy and tax policy to infrastructure and financial services—to mitigate the impacts of climate change and facilitate a timely transition to the U.N. goal of net-zero greenhouse gas emissions by 2050 using the respective tools available under their jurisdictions.⁵ This issue brief focuses on financial regulators, who have so far ignored the clear systemic risk that climate change poses to financial institutions and markets. It’s time for regulators to take decisive steps to ensure that the financial system can withstand climate-related shocks. In particular, the Federal Reserve Board and the Financial Stability Oversight Council (FSOC) have the statutory mandates and tools necessary to coordinate the integration of climate-related risks into the financial supervisory and regulatory frameworks.

This brief outlines why climate change poses a threat to financial stability in the United States and details steps that regulators should take to integrate climate risk into their regulatory and supervisory frameworks.

View the complete November 21 article by Gregg Gelzinis and Graham Steele on the Center for American Progress website here.