Caroline Bradley, Professor of Law, has written widely on matters of British and European financial law. At the University of Miami, she teaches courses in European Community law, United States securities regulation, international finance, contracts, and business associations.
In Miami, to the extent that we focus on climate change, we mostly worry about sea level rise, illustrated recently by king tides that have flooded streets, and about extreme weather events such as hurricanes. The U.S. Conference of Mayors met in Miami Beach in June 2017 and discussed climate change in the wake of the Trump Administration’s announcement that the United States would withdraw from the Paris Climate Agreement.
In Miami, we do not typically think about connections between climate change and financial regulation, except to the extent that weather-related risks have an impact on the housing and insurance markets. Hurricane Andrew in 1992 alerted insurance companies to the enormous potential costs of large storms and created disruptions in the insurance markets in Florida that are still felt today. However, climate change involves risks not just to insurance companies, but also to other firms exposed to climate-related risks plus to other financial firms that lend to and invest in climate-exposed businesses. Climate-related risks, therefore, belong conceptually, and practically, in a category of risks to financial stability that includes risks relating to cybersecurity, terrorism, refugee crises, and political disruptions such as the UK’s referendum vote to leave the European Union “Brexit.”
A decade ago, in response to the global financial crisis, financial regulators and central bankers from the G20 countries announced new measures to control risks to financial stability. Initially, this meant improving capital adequacy standards for banks and addressing risks to the financial system from non-bank firms such as insurance companies, financial market infrastructures, and even asset management firms. But, over time, “financial stability” moved from being conceived of primarily as involving risks originating inside the financial system to involving risks that might have an impact on the financial system, whatever their source. Climate change is an example of the sort of risk to the financial system which originates outside the financial system.
Regulators who worry about being accused of not preventing the next financial crisis, are necessarily concerned to identify all possible contributing factors to financial instability. But, for politicians who worry about whether financial regulators are interfering in matters of politics, the expanding construction of financial stability is an irritant. And, as the Trump Administration focuses on financial deregulation (for example, in the Presidential Executive Order on Core Principles for Regulating the United States Financial System [Feb. 3, 2017]) it is not clear to what extent U.S. financial regulation will address climate change risks to financial stability in the near future.
But, just as cities and states in the U.S. are talking about climate change, private sector entities are involved in discussions about climate change in the context of financial disclosure. The Financial Stability Board, the G20 body which coordinates action relating to financial stability at the international level, encouraged the creation of a Task Force on Climate-Related Financial Disclosures, chaired by Michael Bloomberg, and included a mix of private providers of capital, issuers of securities, accounting firms, and rating agencies. The task force published a final report in June 2017 in which it encouraged firms to think carefully about climate-related financial disclosures, identifying a number of different ways that climate change could affect reporting entities: litigation risk, technology risk, market risk, and reputation risk. The report notes that some climate related risks are material under existing securities laws but also urges firms to use scenario analysis, assessing how they would be affected by different climate change scenarios.
If the federal government does not take effective action to address climate change, can cities, states, and the private sector fill the gap? New York has already suggested it could counteract federal financial deregulation. The task force’s report suggests a way for the private sector to address the financial stability aspects of climate change. In the past, self-regulation has not always worked. Is climate change urgent enough to make it work this time?