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Financial Services Law Insights and Observations

Treasury says financial system is critical in addressing climate change

Federal Issues Department of Treasury Climate-Related Financial Risks FSOC Risk Management

Federal Issues

On September 9, the U.S. Treasury Department’s Under Secretary for Domestic Finance Nellie Liang spoke at the Office of Financial Research’s Climate Implications for Financial Stability Conference discussing the Department’s efforts to assess climate-related risks to the economy, financial institutions, and investors. Pointing to several studies showing the increasing economic and financial costs of climate change, Liang noted that the financial system has a “critical role to play” in addressing climate-related financial risks and that regulators and standard setters have a “responsibility to make the financial system more resilient to climate change.” In particular, Liang identified a Financial Stability Oversight Council (FSOC) report that contained numerous recommendations for its members to consider to address climate change-related threats to financial stability. She also discussed interagency working groups created by FSOC to “bring together the agencies and leverage their efforts to improve data quality and availability, data infrastructure, climate risk metrics, and scenario analysis.” According to Liang, ongoing research—such as that presented at the event regarding how a bank’s climate commitments, the tax code, or borrowers’ scope disclosures “affect the[] cost and availability of credit, and the sensitivity of market-based measures of financial firms’ stress to climate risks”—is “important for regulators and policymakers to better understand private behavior and how incentives can help to manage climate-related financial risks.”