Effects of Climate Change on Finance

Let’s face it: climate change is undoubtedly an ongoing, hot-button issue that affects industries and economies around the world. Exploring financial risks related to climate change, the Commodity Futures Trading Commission (CFTC)’s Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee (MRAC) released a report in September. The report, “Managing Climate Risk in the U.S. Financial System” thoroughly introduced 53 recommendations mitigating climate-related financial risks, which the subcommittee deemed “serious” enough to cause financial and economic instability in the U.S. Risks to include major “capital flights” from industries hit hard by climate change, leading to disruptions of the financial system overall, as described by Politico.

According to the report, existing law provides financial regulators with “wide-ranging and flexible authorities” and financial markets can offer solutions. Interestingly, all 34 members of the Climate Subcommittee voted for the report’s adoption. A variety of financial players make up this subcommittee, including asset managers, environmental group members, academics, and officials from U.S. banks, as Politico cited.

A Carbon Price

Did you know that the greenhouse gas carbon dioxide remains there for between 300 to 1,000 years when added to the atmosphere? According to NASA, carbon dioxide concentration is at almost 412 parts per million (ppm) and rising, a 47 percent increase since the beginning of the Industrial Age and an 11 percent increase since 2000. Also, new satellites continue to offer insight into how carbon emissions into the atmosphere are affecting the planet’s natural cycles, along with other greenhouse gases like methane and water vapor. NASA and other space agencies will also monitor the effects of policy changes on the environment.

One such policy change being considered is a carbon fee, although Congress has reached an impasse over imposing such a fee. According to the CFTC report, an economy-wide carbon price would be necessary to “channel resources efficiently” as Politico cited.

Climate Risks as Part of Material Risk Disclosures

Particularly relevant to investors is the report’s discussion of material risk over “various time horizons.” Requiring disclosure of such risk would keep investors informed on how evolving situations like climate change might impact their investments. For now, many companies do not include climate-related risks in their material risk disclosures, due to the uncertain timeline of effects.

The report remarked on the insufficient tools available to assess climate risk and the lack of common standards. One recommendation of the report is to develop climate stress tests in the U.S. Many companies already report climate risks in Europe, and many central banks in other countries consider such tests.

Reactions to Climate Risk

As cited by Politico, BlackRock, the world’s largest asset manager, acknowledged climate change risk as systemic. Morgan Stanley, Bank of America, Citi, and other banks have agreed to keep track of the greenhouse gas emissions that their lending portfolios finance.

It’s always prudent to consider any potential investment from all angles, including climate-related changes over time. As some industries benefit, others suffer. Additionally, financial trends and newer legislation, such as the JOBS Act and the expanded regulations regarding accredited investors, open up the private placement market to new investors. As the cryptocurrency landscape evolves with the world economy, VerifyInvestor.com will keep you updated.

Updated 5/30/2023

The report highlights the potential for major disruptions in the financial system, including capital flight from industries impacted by climate change. Climate change and its effect on the economy have only grown in importance since this article was published in late 2020. The subcommittee, composed of various financial players, unanimously approved the adoption of the report. One proposed solution mentioned in the report is the implementation of an economy-wide carbon price. It also emphasizes the need for disclosing climate risks as part of material risk disclosures to keep investors informed. The report suggests developing climate stress tests and common standards to assess climate risk. Several financial institutions, including BlackRock, Morgan Stanley, Bank of America, and Citi, have recognized climate change as a systemic risk and have taken measures to track greenhouse gas emissions in their lending portfolios. In the context of evolving financial trends and legislation, such as the JOBS Act and expanded regulations regarding accredited investors, it is essential to consider climate-related changes when evaluating investments.