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Creating a climate of change digest

Climate risk regulatory developments in the financial services industry

A closer look at the biggest regulatory trends shaping the management of climate change financial risks in financial services in the United States, now and in the coming decade.

Leading off

There is a growing linkage between climate policy and global financial markets. Previously, the prevailing view in the United States equated climate risk as more of a social good that was essentially outside most regulatory agencies’ realms. Now, climate risk is viewed as a financial risk. The new administration is building off this momentum and pursuing a whole-of-government approach permeating into the US financial regulatory agencies.

The catalyst for much of this regulatory action in the United States occurred in September 2021, when the Climate-Related Market Risk Subcommittee of the Commodity Futures Trading Commission (CFTC) published its highly anticipated report recognizing how a changing climate could pose systemic risks to the US financial system and anticipating meaningful change on the horizon.

With the United States playing catch-up globally, it may continue looking toward EU and UK financial regulators as a model. Still, the opportunity for the United States to regain a sense of leadership is real.

This month’s digest will look at the Securities and Exchange Commission’s (SEC) recent flurry of activity to integrate climate and environmental, social, and governance (ESG) considerations into the agency’s broader regulatory framework, as well as the interrelationships across the US financial regulatory agencies, including recent public statements on climate stress tests and the integration of climate risks into the Community Reinvestment Act (CRA).

Creating a climate of change digest

The current landscape

Closer scrutiny of climate-related disclosures in public company filings is to come. Acting SEC Chair Alison Lee said the SEC would review weaknesses in existing guidance and voluntary disclosure programs as the agency considers additional measures.

On March 4, 2021, the SEC announced a newly created Climate and ESG Task Force in the Division of Enforcement to be led by Kelly Gibson, the Acting Deputy Director of Enforcement. The new task force will seek to proactively identify ESG-related misconduct using “sophisticated data analysis to mine and assess information across registrants, to identify potential violations.” Its initial focus will be to review public company disclosures “to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” The Climate and ESG Task Force will also evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues and provide expertise to teams working on ESG-related matters across the Division.

Last month, SEC Acting Chair Allison Lee directed the Division of Corporation Finance to review company disclosures, including assessing compliance with federal securities laws and the SEC’s 2010 guidance. In his recent confirmation hearing before the Senate Banking Committee, President Biden’s nominee for SEC Chair, Gary Gensler, said that companies “should not be able to hide” their climate risks from investors. He also said that disclosure regimes on climate risk could be pro-issuer, pro-corporation, and pro-investor.

Critical analysis

The Climate and ESG Task Force is unique because it is focused on a single disclosure issue that has not been the subject of significant prior enforcement actions. Its creation signals that regulators are likely to take more enforcement actions against firms involved in misconduct related to ESG claims. Shareholders are pressuring the financial firms and their regulators to be more proactive on ESG disclosures, particularly those related to climate risks.

There is some disagreement on how to approach climate-risk disclosure issues, especially from Congress. However, SEC Acting Chair Allison Lee is making it very clear how closely the SEC will be considering this emerging risk, including moving ahead with efforts across its offices and divisions to account for how climate and ESG intersect with its regulatory framework. Indeed, the SEC seems to be moving very quickly to focus on possible “greenwashing.” There is potential that this approach will have an extraterritorial reach—for overseas (including UK) companies that issue securities in the United States and, potentially, for overseas funds which US advisers market.

Other notable US regulatory developments:

  • Treasury Secretary Janet Yellen says climate stress tests would be revealing to both regulators and financial firms themselves in terms of managing their risks and that Treasury may play a role in facilitating in the United States.
  • Federal Reserve Board Governor Lael Brainard endorses mandatory climate risk disclosures for public companies and encourages climate-related scenario analysis as a helpful but distinct approach from the Fed’s existing regulatory stress tests at banks.
  • NYDFS announces that New York–regulated banks and credit unions can earn credit under the state's Community Reinvestment Act (CRA) for making climate-friendly loans.

Additional Deloitte perspective on climate risks

For additional insight, please see our ongoing series on how climate risks are shaping US financial regulatory initiatives and the impact these developments may have on the financial services industry and the broader economy.

Creating a climate of change digest

Issue 1: February 2021

Get in touch

Michele Crish
Managing director | Deloitte Risk & Financial Advisory
Deloitte & Touche LLP
Kristen Sullivan
Partner | Audit & Assurance
Deloitte & Touche LLP
Ricardo Martinez
Principal | Deloitte Risk & Financial Advisory
Deloitte & Touche LLP


Deloitte Center for Regulatory Strategy

Irena Gecas-McCarthy
FSI director, Deloitte Center for Regulatory Strategy, Americas
Principal | Deloitte Risk & Financial Advisory
Deloitte & Touche LLP
Austin Tuell
Manager| Deloitte Risk & Financial Advisory
Deloitte & Touche LLP

 

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