Climate change poses a ‘systemic threat’ to companies and the economy, big investors warn

Investors are worried that if regulators don't act, climate change may cause companies, and the economy to take a beating.

The New York Times July 22, 2020 13:01:51 IST
Climate change poses a ‘systemic threat’ to companies and the economy, big investors warn

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.

Climate change poses a systemic threat to companies and the economy big investors warn

Oil refineries as far as the eyes can see in California, US. Image: Edward Burtynsky/Howard Greenberg Gallery/Bryce Wolkowitz Gallery/Robert Koch Gallery

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 SEC 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 Donald Trump has called global warming a hoax, and he has reversed nearly 70 environmental rules, with another 30 in progress.

Nevertheless, Ceres’ recommendations offer a blueprint for how a Democratic administration might begin to tackle climate change, should former Vice President Joe Biden 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,” Gordon said. “But that’s not going to solve the broader problem.”

She said the SEC, 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 change poses a systemic threat to companies and the economy big investors warn

Visitors stand in front of a banner reading "changing minds, not the climate" at a Pavillion on 8 November 2017 during the COP23 United Nations Climate Change Conference in Bonn, Germany. AFP

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 SEC 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, 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 U.S. housing market, “we looked at stress tests for banks, focusing on housing,” 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’ list of recommendations, said that U.S. regulators 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,” 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 Rep. Carlos Curbelo, R-Fla., who signed the letter.

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

Still, 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.”

Christopher Flavelle. c.2020 The New York Times Company

Updated Date:

also read

Explained: What is the ‘Global Shield’ climate fund launched at COP27 and who will it benefit?

Explained: What is the ‘Global Shield’ climate fund launched at COP27 and who will it benefit?

Dubbed ‘Global Shield’, the Group of Seven (G7) has announced an initiative to make funding available for low-income and vulnerable countries hit by climate disasters. However, critics say the plan is a way to avoid talks on a dedicated funding mechanism for climate damages

Climate sustainability in Indo-Pacific: Top priority for India and Australia

Climate sustainability in Indo-Pacific: Top priority for India and Australia

India-Australia relationship has been one of positive transformations in response to common challenges faced by the region. The countries have become two prime examples of important liberal democracies that are shaping the future of the Indo-Pacific region

COP27 extended by a day as deadlock over key issues continues

COP27 extended by a day as deadlock over key issues continues

The success of the talks hinges on a fund to address loss and damage, a term used for irreparable destruction caused by climate change-fuelled disasters