Biden team hits stumbling blocks in greening the US financial system

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Hello from New York. On Tuesday afternoon, Sarah Bloom Raskin, Joe Biden’s pick for the top regulatory job at the Fed, was forced out of the nomination process in the Senate — partly due to her comments about climate change. Please see our report on this below. The saga raises important questions when viewed alongside the inflation spike. How will policies to combat climate change be sidelined by the concerns about the high price for oil?

The optimists we have talked to say that surging oil and gas prices will prompt an acceleration away from these fossil fuels. But the Raskin case will raise concerns that even the most modest US climate policies be disrupted by the resurgent oil and gas industry?

In today’s newsletter, we also have an analysis of the climate situation from the major central bank on the other side of the Atlantic — the European Central Bank. Kristen unpacked the ECB’s report on banks’ climate disclosures and how the results should be interpreted. And Simon gives us an inside look at the new corporate reporting framework from the Taskforce on Nature-related Financial Disclosures. Please read on. (Patrick Temple-West)

Climate change and the Fed: Raskin’s nomination blocked

US senator Joe Manchin © Bloomberg

Climate policy at the Federal Reserve and other US financial regulators started to see signs of life last year after four years of neglect during the Trump administration. For one thing, the US rejoined the Paris climate accords, enabling the Federal Reserve to officially join the Network for Greening the Financial System (NGFS).

But more substantive climate change action has become bogged down. On Tuesday, Sarah Bloom Raskin, Biden’s pick for the top regulatory job at the Fed, withdrew from the nomination process. She stepped down one day after Democratic senator Joe Manchin said he would not support her. Raskin had endorsed using the US financial regulatory apparatus to ensure “our financial markets can price in climate change risks”.

Republicans warned Raskin’s positions on climate would result in the Fed picking winners and losers — with oil and gas businesses suffering the consequences. Without Manchin’s support, Raskin’s confirmation was all but doomed.

The role Raskin has been nominated for, the vice-chair of supervision, has been targeted by environmentalists as a crucial position for combating climate change. If the Fed adopted climate stress tests that mirror those of European central banks, then US banks would need to seriously consider shedding carbon-intensive assets.

Senator Sherrod Brown said that too many of his colleagues “fell for talking points written by the oil and gas industry” about Raskin. “Republicans engaged in a disingenuous smear campaign, distorting Ms Raskin’s views beyond recognition,” he said on Tuesday.

It marks the second time in as many months that a Biden nominee has been torpedoed for having strong views about how financial regulations can steer climate action. Saule Omarova, Biden’s pick to lead the Office of the Comptroller of the Currency, drew similar concerns over her comments about climate change.

These nomination sagas underscore how divisive an issue climate change has become in Washington. Despite the attention given to recent reports from the Intergovernmental Panel on Climate Change, fossil fuel businesses still have the upper hand in Washington — and increasingly so as surging gasoline prices crush drivers. For now, the EU will remain the driving force in identifying and mitigating climate risks in the financial system. (Patrick Temple-West)

Former policymaker calls for ECB to reconsider climate disclosure rules

The European Central Bank has issued a stern warning to banks: disclose more information about your climate risks or you could find yourself wearing the dunce’s cap.

In a report this week, the ECB said while banks had reported that they were exposed to climate risks, they had not disclosed the details of those risks. Notably, none of the 109 lenders it oversees had provided the complete list of climate and environment risk disclosures that will soon be required by the European Banking Authority, and only 12 per cent had disclosed any climate assessments at all.

By the end of 2022, banks failing to disclose exposures to climate risks could be in breach of EU law, and the ECB said it had the option to publicly name banks that repeatedly failed to disclose their climate and environmental risks.

Bar chart of Number of assessments per sector  showing Only 12 per cent of the banks the ECB oversees have conducted climate portfolio assessments

The report landed a month after conservative members of the European Parliament accused the ECB of using the bank’s climate-focused strategy as a “distraction” against rising inflation risk.

Patrick Honohan, former governor of the Central Bank of Ireland, told Moral Money that this was a way for the ECB to say “told you so” when the European Banking Authority made the disclosures mandatory. The ECB could argue their compliance department was on top of it.

“Banks [aside from the ECB] have departments on this that aren’t doing anything,” he said. “They are complying with what they have to do now, but aren’t making progress on what they will have to disclose.”

The ECB’s criticisms might not actually proceed to name and shame recalcitrant ones. But tough talk gets results, and the warnings highlight how seriously the ECB is taking climate risks when compared with the situation in the US. (Kristen Talman)

A sneak peek of a new corporate biodiversity framework

The world’s biodiversity crisis, desperately urgent as it may be, has long struggled to get anything approaching the attention paid to the climate struggle. There’s been more dispiriting news this month, with the UN biodiversity summit in Kunming reportedly set to be pushed back a fourth time, from April to August, because of soaring Covid-19 rates in China.

But when it comes to corporate disclosures in this area, there has been some movement. In October we flagged the launch of the Taskforce on Nature-related Financial Disclosures, an initiative to build a framework for companies to report the effects they have on the natural world, and the risks associated with that — from water usage to land degradation. Yesterday, the body released a prototype of that framework. Extensive further consultations will follow. The finished version won’t be published until late next year, but the document gives a useful indication of the direction of travel in this space.

You can take a look at the document here. One interesting aspect is a heavy focus on location: companies will be expected to file details of the biome where their operations are situated, with options ranging from “polar-alpine” to “artificial subterranean spaces”.

“Everyone’s been behind the idea that you have to approach this from a location-first base,” TNFD co-chair David Craig told me. While a business’s carbon emissions will have much the same warming impact wherever it’s situated, he pointed out, a given amount of water usage could be benign or disastrous depending on the surrounding environment.

The report also highlights some of the continuing challenges around transparency in this field. The TNFD’s stated goal is to support financial flows “toward nature-positive outcomes” — yet it concedes that there is still no clearly accepted definition of what that term actually means. And while companies have some clear overarching targets to keep in mind where climate change is concerned, notably the Paris goal of restricting warming to 1.5C, these “don’t yet fully exist for the world of nature”, Craig said.

Still, he argued, businesses “are really waking up” to the need to take nature-related risks far more seriously, citing conversations with scores of companies in the past few months. Rather than overshadowing the biodiversity fight, he reckoned, the growing focus on climate action was driving broader corporate engagement across the full suite of environmental issues. A clearer picture will emerge in 2024 when we see how seriously companies take the TNFD’s finished framework. (Simon Mundy)

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