CFTC subcommittee report hailed as a ‘dramatic milestone’ in addressing climate risk

Updated with clarification

The first U.S. government report on climate change's financial impact is sparking some optimism among sustainability-minded investors and advocates.

"The importance of this report to investors can't be overstated," said Divya Mankikar, investment manager for the sustainable investment team at the $417.3 billion California Public Employees' Retirement System, Sacramento.

"It is a dramatic milestone," noted Steven Rothstein, Boston-based managing director of the Ceres Accelerator for Sustainable Capital Markets, a Ceres initiative advocating for capital market policies to address global climate change.

The report was requested by CFTC Commissioner Rostin Behnam and issued Sept. 9 by the Commodity Futures Trading Commission's climate-related market risk subcommittee, an advisory group. It warned that "frequent and devastating shocks from climate change" pose a threat to U.S. financial markets, affecting multiple sectors, geographies and assets in the United States, "sometimes simultaneously and within a relatively short time frame."

The 34 members of the non-partisan advisory subcommittee, including Ms. Mankikar and representatives of Wellington Management Co. LLP, Vanguard Group Inc., Allianz Global Investors and BNP Paribas Americas as well as corporate interests, voted unanimously to adopt the report, "Managing Climate Risk in the U.S. Financial System." With climate change one of the top three risks to CalPERS, along with investment returns and employers' ability to contribute to the pension fund, "CalPERS was honored to be nominated to the subcommittee, joining a panel of experts in sounding an urgent call for U.S. financial regulators to set a clear path to a low-carbon economy," Ms. Mankikar said.

The report does not represent the CFTC's official position on climate change. Chairman and Chief Executive Heath Tarbert, a Republican, in a statement acknowledged the importance of climate risk, but also pointed out that the report touched on transition risks that "could be just as disruptive to our financial system as the possible physical manifestations of climate change, and that moving too fast, too soon could be just as disorderly as doing too little, too late."

The report offers 53 recommendations for steps that policymakers, regulators and stakeholders could take to build a climate-resilient financial system.

The findings align with the strategy and insights in CalPERS' first Task Force for Climate-Related Financial Disclosures report released earlier this summer, Ms. Mankikar said. "The key recommendations, including adopting a meaningful carbon price, mandating climate risk reporting and enabling investment in resilience, will help asset owners like CalPERS achieve our goals," she said.

The CFTC report's call for a price on carbon pollution is grabbing a lot of attention. "Clearly the next step is we have to put a price on carbon," said subcommittee Chairman Robert Litterman, a former Goldman Sachs Asset Management risk manager and founding partner of Kepos Capital LP, a New York-based systematic global macro firm.

"Incentives are incredibly powerful," Mr. Litterman said on a press briefing convened by Ceres. "We do have a problem with political inertia and that has to be addressed immediately. It's not going to get better on its own. When you have a risk management problem, you've got to address it immediately. The rest of the world is waiting for the U.S. to catch up. Until the U.S. gets involved it's not going to happen, so it's very important we take these steps and we coordinate," Mr. Litterman said.

Financial regulators, the report said, should incorporate climate-related risk into their mandates and oversight functions, and they already have authorities that could be used in four areas: oversight of systemic financial risk; risk management of specific markets and financial institutions; disclosure and investor protection; and safeguarding financial sector utilities.

CFTC commissioner Mr. Behnam said on the Ceres briefing that the report "far exceeded expectations," despite the politics of climate change in the U.S.

"It really becomes a defensible document on many fronts that has a lot of merit and a lot of credibility to it. What this report has done has moved climate risk from the nice-to-have list to the must-have list," he said.

For Mr. Behnam, the report's "No. 1 lesson is all about building coalitions," he said.

That was made evident in July, when a group of investors with nearly $1 trillion in assets called on U.S. regulators to consider climate change as a systemic financial risk.

The July 21 letter from pension funds and other prominent investors to regulators, including the heads of the Federal Reserve and the Securities and Exchange Commission, said: "It is more clear than ever that the climate crisis poses a systemic threat to financial markets and the real economy, with significant disruptive consequences on asset valuations and our nation's economic stability."

The 72 signatories, including the $253.6 billion California State Teachers' Retirement System, West Sacramento; $211.2 billion New York City Retirement Systems; $210.5 billion New York State Common Retirement Fund, Albany; $56.1 billion Maryland State Retirement & Pension System, Baltimore; and the $3 billion Seattle City Employees' Retirement System, referred regulators to more than 50 recommendations in a June report from Ceres on addressing systemic risk, and said that the regulators' mandates come with a responsibility to address the climate crisis "right now and to guide our transition to a net-zero future."

Since that June report, "we've had more than 500 conversations with regulators," Mr. Rothstein of Ceres said. Though he does not expect dramatic changes before the November elections, he is encouraged by the number of "very fruitful" conversations, which fall into two categories: what regulators should be doing it, and what they can do.

"We are all more attuned to the risks. If you look at countries that are leading the way, the financial regulators are involved. I do sense a real momentum that people are addressing this," Mr. Rothstein said.

That includes Congress, which for the CFTC's Mr. Behnam is "a huge part of this conversation." The Senate is having its own breakthrough on climate change, according to Democratic Sen. Tom Carper of Delaware, who along with two Republican members of the Senate Environment and Public Works Committee, Chairman John Barrasso of Wyoming and John Kennedy of Louisiana, recently introduced an amendment to the American Energy Innovation Act to deal with greenhouse gas-producing hydrofluorocarbons. It would implement an 85% phase-down on their use and importation over the next 15 years and put the United States on a path to meet targets outlined under an international treaty to preserve the ozone layer.

The CFTC report, Mr. Carper tweeted, "reminds us that no aspect of our lives is immune to the climate crisis, including the economy. Failing to take the necessary steps to ensure that the U.S. moves to a net-zero emissions economy is a threat to people's lives and livelihoods."