U.S. financial regulators are expected to step up their efforts to incorporate climate-related risks into their oversight, bringing the U.S. into closer alignment with the rest of the world, says Fitch Ratings.
In a new report, the rating agency said that, so far, U.S. financial sector regulators have been a “notable laggard” in addressing climate risks.
That’s expected to change under the new U.S. administration, which “has made addressing climate change a top priority,” Fitch said.
“Treasury Secretary appointee and long-time climate policy advocate, Janet Yellen, will likely raise the profile of climate risk among both financial regulators and the general public in her role as chair of the Financial Stability Oversight Council,” the rating agency said.
Additionally, the U.S. Federal Reserve Board recently joined the Network of Central Banks and Supervisors for Greening the Financial System, and the Fed board created a climate committee last month.
The new heads of other financial sector regulators, such as the U.S. Securities and Exchange Commission (SEC) and the Comptroller of the Currency, have yet to be appointed. But, Fitch said that those leaders will likely share similar priorities, raising “the prospect of legislation to embed climate change in prudential regulation.”
As U.S. regulators bring their approach to climate risk more closely in line with the rest of the world, this “could accelerate international cooperation on climate risk capital requirements,” Fitch said.
“Incremental steps may include the development of climate-related ‘best practices’ for financial institution risk managers, the refinement of data collection/reporting standards, and climate change risk scenarios in supervisory stress tests,” the rating agency said, noting that several countries (led by France and the U.K.) have started incorporating climate considerations into their stress testing.
“We expect this trend to become more mainstream globally,” Fitch said.
As for banks, “Regulation that incorporates growing climate-related risks could be supportive of bank credit profiles over the long term.”