USA: A Climate for Change

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The US regulators, Securities and Exchange Commission (SEC) and Federal Reserve, issued market communications on ESG and Climate change related considerations.

This represents a significant commitment to ESG and much wider governance and climate related risk considerations, in light of the USA’s National Climate Change Assessment and recognition that climate change is inherently a cross-border and cross-sectoral challenge requiring both domestic and international coordination.

US SEC:  Meeting Investor Demand for Climate and ESG Information at the SEC

Allison Herren Lee, Acting Chair of the SEC, released a communication to the market in March 2021 to highlight the focus points with regards to ESG, including an invitation for public comment on ESG disclosure and data. She provided insight into the direction of policy the SEC is looking to develop and consider, including investor disclosure and the governance and voting structures around investments:

Informing the Markets

Request for public comment on climate disclosures to identify what and how disclosures should be made to reflect market and scientific developments.

 

Call to consider political spending disclosures and ESG where companies have made pledges for carbon neutrality but donations made to candidates that do not have consistent ESG policies.

 

Protecting Shareholder Rights

 

Disclosure and the use and application of information to drive corporate decision making towards sustainable solutions and long-term value creation.

 

Improvement to shareholder proposal process and proxy voting to ensure that investor ESG strategies are carried through to the voting, even when conducted via proxy.

 

Ensuring Accountability

Enhancing corporate accountability to investors through enhanced transparency and through supporting the exercise of shareholder rights.

 

Formation of Division of Enforcement’s Climate and ESG Task Force.

 

Engaging Across Boundaries

Supporting the work of IOSCO’s Sustainability Standards Board (SSB) and approach to baseline and standarised reporting.

 

Building domestic sustainability standards that allow flexibility to evolve as needed.

 

 

Financial Stability Implications of Climate Change

Governor Lael Brainard, in his speech of March 23, 2021, set out personal views on the financial stability implications of climate change, including the severity of the impact on economies driven by Physical effects of climate change and potential losses that could arise on climate-sensitive assets caused by environmental shifts, by a disorderly transition or both.

To consider the financial stability implications, the Federal Reserve has created a new Supervision Climate Committee (SCC) to strengthen capacity to identify and assess financial risks from climate change and to develop an appropriate program to ensure the resilience of supervised firms to those risks.  The Federal Reserve’s framework currently has 2 pillars:

  • Addressing economic and financial consequences of climate change;
  • Addressing macro-financial risks of climate change.

To complement the work of the SCC, the Federal Reserve Board is establishing a Financial Stability Climate Committee (FSCC) to identify, assess and address Climate-related risks to financial stability.

From a micro-prudential perspective, the Federal Reserve Supervision and Regulation Report has further discussed the effects of climate change and how it can manifest in the financial system via traditional channels like credit, market, operational, legal and reputational risks that affect the safety and soundness of individual firms.

Due to the considerable uncertainty about the nature and timing of the policy, behavioural and technological changes that will occur during the transition to a sustainable economy, this uncertainty could create significant risks for financial stability. The need for transparency is key to manage these potential risks.

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