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CFTC Report Recommends U.S. Financial Regulatory Reforms to Address Climate-Related Risks

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On September 9, 2020, the U.S. Commodity Futures Trading Commission’s (“CFTC”) Market Risk Subcommittee of the Market Risk Advisory Committee released a report entitled “Managing Climate Risk in the U.S. Financial System.”  The report examines climate-related impacts on the U.S. financial system and makes 53 recommendations to mitigate the risks to financial markets posed by climate change, including numerous regulatory reforms.

The regulatory-based recommendations include:

  • Regulators should prescribe a consistent and common set of broad climate risk scenarios, guidelines, and assumptions and mandate assessment against these scenarios.
  • State insurance regulators should require insurers to assess how their underwriting activity and investment portfolios may be impacted by climate-related risks and, based on that assessment, require them to address and disclose these risks.
  • Financial regulators, in coordination with the private sector, should support the availability of consistent, comparable, and reliable climate risk data and analysis to advance the effective measurement and management of climate risk.
  • Financial regulators, in coordination with the private sector, should support the development of U.S.-appropriate standardized and consistent classification systems or taxonomies for physical and transition risks, exposure, sensitivity, vulnerability, adaptation, and resilience, spanning asset classes and sectors, in order to define core terms supporting the comparison of climate risk data and associated financial products and services. To develop this guidance, the United States should study the establishment of a Standards Developing Organization (SDO) composed of public and private sector members.
  • Financial regulators should clarify the definition of materiality for disclosing medium- and long-term climate risks, including through quantitative and qualitative factors, as appropriate.
  • Regulators should review and update the SEC’s 2010 Guidance on climate risk disclosure to achieve greater consistency in disclosure to help inform the market. Regulators should also consider rulemaking, where relevant, and ensure implementation of the Guidance.  Rules should build from existing standards that provide industry-specific climate disclosure recommendations, for example, those developed by the TCFD, SASB, CDSB, the Physical Risks of Climate Change (P-ROCC) framework, and the Global Real Estate Sustainability Benchmark (GRESB) standards for real estate and infrastructure.
  • Regulators should require listed companies to disclose Scope 1 and 2 emissions. As reliable transition risk metrics and consistent methodologies for Scope 3 emissions are developed, financial regulators should require their disclosure, to the extent they are material.
  • Once climate risk disclosure standards are well advanced, accounting standards regulators should undertake a mapping exercise of the applicability of accounting standards to climate-related disclosure and subsequently issue guidance on disclosure, as appropriate.
  • United States and financial regulators should review relevant laws, regulations and codes and provide any necessary clarity to confirm the appropriateness of making investment decisions using climate-related factors in retirement and pension plans covered by the Employee Retirement Income Security Act (ERISA), as well as non-ERISA managed situations where there is fiduciary duty. This should clarify that climate-related factors—as well as ESG factors that impact risk-return more broadly—may be considered to the same extent as “traditional” financial factors, without creating additional burdens.

The report makes numerous other recommendations directed toward regulatory bodies, Congress and the wider financial community, including calling for a U.S. price on carbon.  The CFTC report is available here.

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