Senate panel spars over financial regulators' climate agenda

Senate panel spars over financial regulators' climate agenda
© Bonnie Cash

Senators sparred Thursday over the role financial regulators should play in the fight against climate change as federal agencies move toward tighter requirements for major firms.

During a Thursday hearing on the climate risks facing the financial system, members of the Senate Banking Committee highlighted the deeply partisan divide over a growing focus for the industry and its supervisors.

Democrats argued that the intensifying effects of climate change posed significant dangers in nearly every pocket of the financial system and praised federal regulators for initial steps toward monitoring those risks. They also expressed concerns over whether the financial sector was equipped to handle the disruption caused by a shift to renewable energy and away from fossil fuels.

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“We can't protect the economy and the people who make the work if we don't start by identifying the risks,” said Sen. Sherrod BrownSherrod Campbell BrownBiden faces new pressure from climate groups after Powell pick Five Senate Democrats reportedly opposed to Biden banking nominee Senate Democrats call on Biden to push for COVID-19 vaccine patent waivers at WTO MORE (D-Ohio), the committee’s chairman. 

“That means looking at stronger transparency rules," he added. "It means looking at whether the tools that financial watchdogs already have can help shine a light on these risks.”

In a bid to catch up to their foreign counterparts, the Federal Reserve and Securities and Exchange Commission (SEC) have taken steps to account for those risks.

The Fed this year created a committee to consider how it should incorporate climate-related risks into the ways it supervises. Fed Chairman Jerome Powell told lawmakers that while the central bank is not considering stress tests, it may ask banks to explain how they would respond to several climate-related scenarios to gauge their preparedness.

Acting SEC Chair Allison Herren Lee, a Democrat, is also laying the groundwork for the commission to bolster its enforcement of climate-related risk disclosure requirements, drawing opposition from the agency’s two Republican commissioners. 

Republican members of Congress have also been fiercely critical of efforts to bolster climate-related financial regulation. GOP lawmakers are skeptical of regulators’ abilities to calculate the costs of a deeply uncertain future and say that the Fed and SEC have no business getting involved in climate policy.

“The Fed is not in the position to navigate the enormous uncertainties and complexities underlying climate models, financial regulators just have no experience or expertise in environmental policy and any attempt to impose new requirements will only result in the government picking winners and losers losers,” said Sen. Pat ToomeyPatrick (Pat) Joseph ToomeyBlack women look to build upon gains in coming elections Watch live: GOP senators present new infrastructure proposal Sasse rebuked by Nebraska Republican Party over impeachment vote MORE (R-Pa.).

“The Fed should not follow the example of some other regulators engaged in mission creep and nor should the SEC,” he added. 

Democrats, environmentalists and financial sector critics have long called for U.S. agencies to pay closer attention to the climate-related risks facing the industry. 

Harsher, more frequent severe weather can derail financial firms that mortgage or insure homes in areas susceptible to floods, storms and fires. Farmers, their creditors and commodity traders could face steepening losses as harvests get wiped out.

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“I’m a third-generation farmer. I have a real job outside the Senate, and I will tell you I've seen the impact of climate change first hand," said Sen. Jon TesterJonathan (Jon) TesterFive ways Senate could change Biden's spending plan Five Senate Democrats reportedly opposed to Biden banking nominee Dark money group spent 0M on voter turnout in 2020 MORE (D-Mont.). "I've been on the farm since 1978 and I've seen thing happen in the past 25 years that my father never saw happen and my grandfather certainly didn't either."

Banks with heavy exposure to highly leveraged oil and gas companies could also land in trouble amid a transition to less carbon intensive forms of energy. 

“The financial system and the real economy will be devastated if the planet continues to warm, with real losses already manifesting in some sectors and asset classes, but the challenge goes far beyond just protecting the financial system to climate risk,” said Marilyn Waite, program officer at the William and Flora Hewlett Foundation.

“In fact, finance is an essential part of solving climate change, and can do so while creating jobs and innovation,” she said. 

Nearly all of the biggest U.S. banks have vowed to go entirely carbon neutral by 2050 and advocates for the industry say most financial firms are already taking measures to monitor and account for climate-related risks.

Skeptics of strict financial regulation said that preparing for any climate-related risks, should they exist, should be left to financial firms, not government agencies susceptible to political influence.

“Don't let the EPA regulate banks. Don't let our financial regulators dream up climate policy. You'll get bad climate policy and a more fragile and sclerotic financial system if you do,” said John Cochrane, senior fellow at the Hoover Institution, a right-leaning think tank.