Climate Change Poses ‘Systemic Threat’ to the Economy, Big Investors Warn

Source: By Christopher Flavelle, New York Times • Posted: Tuesday, July 21, 2020

Financial regulators should act to avoid economic disaster, according to a letter from pension funds and other investors representing almost $1 trillion in assets.

A letter signed by executives from pension plans and other major investors warned the Federal Reserve and other agencies of the financial risks of climate change.
Leah Millis/Reuters

WASHINGTON — Climate change threatens to create turmoil in the financial markets, and the Federal Reserve and other regulators must act to avoid an economic disaster, according to a letter sent on Tuesday by a group of large investors.

“The climate crisis poses a systemic threat to financial markets and the real economy, with significant disruptive consequences on asset valuations and our nation’s economic stability,” reads the letter, which was signed by more than three dozen pension plans, fund managers and other financial institutions that together manage almost $1 trillion in assets.

That financial threat, combined with the physical risks posed by climate change, may create “disastrous impacts the likes of which we haven’t seen before,” the letter says. It urges the Fed, the Securities and Exchange Commission and other agencies to “explicitly integrate climate change across your mandates.”

Investors worry that if regulators do not act, climate change may cause the price of some companies to fall suddenly, the effects of which may ricochet through the economy. Providing more information about that risk — for example, by requiring companies to disclose more about their greenhouse gas emissions, or which of their facilities are at risk from rising seas — could help investors make better decisions.

That, in turn, might encourage companies to lower their emissions, or risk losing access to investment or affordable insurance coverage. “Every medium and large business has bank loans and has insurance,” said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, a group that works with investors and which organized the letter.

The letter calls on regulators to adopt the steps Ceres outlined last month in a report that makes 51 recommendations to eight federal agencies. At its core are two demands: that the agencies treat climate change as a systemic risk, and that the S.E.C. ensures mandatory and consistent disclosure of climate threats facing companies.

According to Ceres, regulators can adopt each of its recommendations without new legislation from Congress. Still, during the Trump administration, even agencies that are meant to have a degree of independence from the White House have been reluctant to address climate change. President Trump has called global warming a hoax, and he has reversed nearly 70 environmental rules, with another 30 in progress.

Nevertheless, Ceres’s recommendations offer a blueprint for how a Democratic administration might begin to tackle climate change, should former Vice President Joseph R. Biden Jr. win the presidency in November. Last month, Democrats on the House Select Committee on the Climate Crisis released a report that echoed some of the recommendations from Ceres, particularly ones regarding the disclosure of financial risks.

The letter on Tuesday suggests that those recommendations have significant support among investors as well.

The letter was signed by some of the largest pension funds in the country, including the California State Teachers’ Retirement System, or CalSTRS, which manages $246 billion; the New York City Comptroller’s Office, which oversees pension funds worth $206 billion; and the New York State Comptroller’s Office, which manages the state’s $211 billion retirement fund.

Liz Gordon, executive director of corporate governance for New York State’s fund, said that even large institutional investors with skilled researchers could not protect their holdings against climate risk. “We do a lot of engagement with companies individually,” Ms. Gordon said. “But that’s not going to solve the broader problem.”

She said the S.E.C., which regulates the stock market and requires publicly traded companies to regularly disclose information about a range of perils they face, should also require those companies to better disclose the financial risks they confront from climate change.

Climate Fwd: What on earth is going on? Get the latest news about climate change, plus tips on how you can help.

Other asset managers warned that climate change would increasingly disrupt businesses.

Julie Gorte, senior vice president for sustainable investing at Impax Asset Management, which manages $23 billion, said the S.E.C. should force companies to disclose the location of their physical assets, such as factories and other facilities. That way, investors can gauge the risks facing those facilities from wildfires, hurricanes or flooding, and push companies to address them. Investors would then be able to choose whether to invest based on that information.

“Regulators actually have the power to make the risks smaller,” she said. “That will help all investors.”

Another useful change, Mr. Rothstein said, would be for the Fed to require banks to examine the climate vulnerability of the companies they lend money to. Banks already do those tests for other types of financial risk, through a process that regulators and investors call “stress tests.”

Banks could then use the information from those climate-related stress tests to increase the amount of money they hold in reserve, to help them stay solvent if some of those companies defaulted. After the 2008 financial crisis and the collapse of the United States housing market, “we looked at stress tests for banks, focusing on housing,” Mr. Rothstein said. Now, he said, “think about the climate risks.”

Sarah Bloom Raskin, a former Federal Reserve governor and deputy secretary of the Treasury who wrote the foreword to Ceres’s list of recommendations, said that regulators in the United States were falling behind their counterparts in other countries, which have already begun imposing stress tests for climate change as well as other steps.

“You see very credible central banks, like the Bank of England and the European Central Bank, taking the risk of a climate calamity into their mission in a very disciplined and structured way,” Ms. Raskin said. “These aren’t fringe ideas.”

While the changes don’t require congressional approval, the objections of some Republican lawmakers to acting on climate change have had a chilling effect on regulators, said former Representative Carlos Curbelo, Republican of Florida, who signed the letter.

“Some civil servants logically fear that certain legislators, certain committees would come after them or attack them,” Mr. Curbelo said. “By and large, regulators try to stay out of controversy.”

Still, Mr. Curbelo said the need to act was clear. “The risks are real,” he said, “and those of us who live here in South Florida observe them on a daily basis.”