Could Climate Change Wipe Out the U.S. Financial System?

The administration of President Joe Biden is launching an effort to assess how much climate change could affect the stability of the U.S. financial system.

Part of the effort will involve scrutiny of insurance regulation and of regulation of pensions and retirement savings arrangements.

The president started the effort Thursday by signing an executive order on climate-related financial risk.

The president asserts in the order that climate change is getting worse and poses a physical risk to private investments.

“The failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks threatens the competitiveness of U.S. companies and markets, the life savings and pensions of U.S. workers and families, and the ability of U.S. financial institutions to serve communities,” the president says.

The president talks about insurers in the third section of the order, “Assessment of Climate-Related Financial Risk by Financial Regulators.”

He talks about retirement savings in the fourth section, “Resilience of Life Savings and Pensions.”

Executive Order Section 3: Assessment of Climate-Related Financial Risk by Financial Regulators

U.S. Treasury Secretary Janet Yellen and the Financial Stability Oversight Council (FSOC) are supposed to look at the possible effects of climate change on financial institutions and report back within 180 days.

FSOC is a 15-member body that’s supposed to help U.S. financial services regulators detect, track and manage trends and forces that could topple the U.S. financial system.

FSOC includes an independent member with insurance expertise; the director of the Treasury Department’s Federal Insurance Office, who serves as a non-voting member; and a state insurance commissioner, who also serves as a non-voting member.

The third section of the executive order calls for Yellen and FSOC to assess, “in a detailed and comprehensive manner, the climate-related financial risk, including both physical and transition risks, to the financial stability of the Federal Government and the stability of the U.S. financial system” and report back within 180 days.

Yellen is also supposed to ask the Federal Insurance Office to “assess climate-related issues or gaps in the supervision and regulation of insurers, including as part of the FSOC’s analysis of financial stability, and to further assess, in consultation with states, the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts.”

The order does not specifically mention life insurance, annuities or concerns about the possible effects of climate change on life and annuity issuers’ investments.

Linda Lacewell, the superintendent of financial services in New York state, proposed draft climate change management standards for insurers in March. Lacewell’s draft regulation would require all insurers to analyze how hurricanes, floods, wildfires and other climate-related events might affect their investment portfolios.

Executive Order Section 4: Resilience of Life Savings and Pensions

In the life savings and pensions section of the order, the president says the U.S. labor secretary should identify any agency actions that could be undertaken under the Employee Retirement Income Security Act of 1974 (ERISA) and other laws to “protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk.”

The labor secretary, Martin Walsh, is supposed to report back in 180 days.

The labor secretary is also supposed to consider publishing, by September, a draft rule that would cancel an effort by the Trump administration to discourage retirement plans from linking investment decisions to environmental sustainability concerns.

The U.S. Department of Labor has already indicated that it will decline to enforce the ban on sustainability-linked investment decisions.

(Image: gawriloff/Adobe Stock)