The human and economic costs of climate change are increasingly visible across the U.S. In turn, regulators tasked with overseeing the economy and financial markets are focusing their attention to risks from climate hazards like floods, wildfires, and heatwaves. In 2021, the Biden Administration issued an executive order directing key regulatory agencies to review how they can address climate-related financial risk. In the year that followed, several agencies have taken encouraging steps to integrate climate risk into their work. Despite these important developments, much remains to be done to successfully ensure that climate change considerations are integrated into financial regulation — a task that requires collaboration and engagement across different technical domains.
In May of 2022, CarbonPlan, the Environmental Defense Fund (EDF), and the Initiative on Climate Risk and Resilience Law (ICRRL) hosted a joint Chatham House Rule workshop on physical climate risk and U.S. financial regulation. Motivated by the need to identify core constraints that arise when linking physical climate data to the financial sector, this workshop brought together former regulators, climate scientists, and experts in finance and economics. Our goal was to better understand what physical climate change information was being used by regulators, and what strategies exist that could improve the use of that information.
Coming out of the workshop, it’s clear that there is a need for more collaboration opportunities between financial practitioners and climate scientists. It’s also clear that determining how regulatory agencies can best oversee and support physical climate-risk responses requires ongoing effort from both scientists and regulators.
The workshop identified several emerging themes and directions for further research.
- Policymakers and interested stakeholders need to engage directly with each other to determine challenges and identify solutions.
- Actors in the financial sector could benefit from a climate science ‘translator’ to reduce the risk of the misinterpretation or misapplication of climate data.
- Robust scientific and practical frameworks are needed to guide the analytical process.
- Open-source climate models and data are needed to support stress-testing and scenario analyses.
You can read a more in-depth summary of the workshop here.