CFTC subcommittee report on climate risk

An advisory subcommittee of the U.S. Commodity Futures Trading Commission (CFTC) has released a report, Managing Climate Risk in the U.S. Financial System. Calling itself the first of-its-kind effort from a U.S. government entity, the report finds that "climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy" and that "U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks". The report offers 53 recommendations to mitigate the risks to financial markets posed by climate change.

CFTC's mission is promoting the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. Structurally, CFTC's organization includes several Advisory Committees, created to provide input and make recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets.

These committees include the Market Risk Advisory Committee, which "advises the Commission on matters relating to evolving market structures and movement of risk across clearinghouses, exchanges, intermediaries, market makers and end-users. It examines systemic issues that threaten the stability of the derivatives markets and other financial markets, and makes recommendations on how to improve market structure and mitigate risk." The Market Risk Advisory Committee itself includes several subcommittees, including the Climate-Related Market Risk Subcommittee which is composed of over 30 representatives of financial system participants.

On September 9, 2020, the Climate-Related Market Risk Subcommittee unanimously voted to adopt and release its report, Managing Climate Risk in the U.S. Financial System. The report describes various ways in which climate change and related risks represent threats to the U.S. financial system. As summarized in a press release by the subcommittee, the report finds that:

Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy;

Climate risks may also exacerbate financial system vulnerability that have little to do with climate change; including vulnerabilities caused by a pandemic that has stressed balance sheets, strained government budgets, and depleted household wealth;

U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks;

Existing statutes already provide U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now;

Regulators can help promote the role of financial markets as providers of solutions to climate-related risks; and

Financial innovation is required not only to efficiently manage climate risk but also to facilitate the flow of capital to help accelerate the net-zero transition and increase economic opportunity.

The report presents recommended actions, including establishing an economy-wide carbon price, incorporating climate-related risks into all relevant federal financial regulatory agencies' mandates and strategies, requiring bank and nonbank financial firms to address climate-related financial risks through their existing risk management frameworks in a way that is appropriately governed by corporate management, enhancing climate risk disclosures for various time horizons, and coordination with other regulators to support the development of a robust ecosystem of climate-related risk management products.

Every member of the subcommittee voted to release the report on behalf of the panel, but not all participants expressed endorsement for all of the report's findings. In addition, the report may be influential as a matter of policy, but it is not formally binding on CFTC, and may represent a different perspective than that of the Commissioners or the agency itself.