Climate change may be coming for your index funds, and the government is making those risks harder for investors to see, former regulators say.
Spiking global temperatures are already affecting corporate bottom lines — making insurance harder to get, disrupting supply chains and lowering crop yields. Scientists say those and other climate change impacts will compound over the coming decades — especially in the absence of aggressive climate policies — and make debt and equities markets riskier.
Some former regulators worry that those risks could filter through to plain-vanilla index funds and retirement portfolios.
President Donald Trump has spent his first 18 months in office slashing policies across the federal government that were designed to cut emissions or prepare for a warming climate. Federal financial regulatory agencies have been no exception, with Trump appointees targeting rules that boosted the visibility of potential threats to markets and banking from more severe and frequent storms and floods, wildfires, sea-level rise and other climate impacts. The Securities and Exchange Commission’s proposal in May to scrap a rule requiring public companies to disclose climate information that may impact their corporate bottom lines is one case in point.
Trump has taken great pride in the fact that his second term has been marked by stock market records. Last week on his Truth Social site, he posted that soaring equities values meant that under his leadership “investors know America is WINNING!”
But his critics warn that by obscuring threats to the markets from climate change or from future policies to address it, Trump and his appointees are increasing the likelihood that there will be a sudden — and potentially brutal — repricing of assets at some point in the future when investors wake up to those risks. Allison Herren Lee, who led the Securities and Exchange Commission in 2021, called climate risks “some of the most urgent, pressing — but non-transparent — investment risks we’ve seen in my lifetime.”
“There’s broad agreement that climate risks pose a risk to the economy across the board that could then show up in people’s diversified investments and maybe even set off instability in the financial system,” said Mika Morse, who served as climate counsel at the SEC from 2021 to 2025.
Former federal regulators worry that these risks may be growing out of sight of most investors, who may not have the tools to assess the true risk they’re carrying in their portfolios.
“I think we’re flying blind in terms of what the true risks are, and where the hot spots are, which company or which sectors or which geographies may warrant the most attention,” said Nina Chen, who served as the chief climate risk official at the U.S. Office of the Comptroller of the Currency during the Biden administration and is now senior climate finance officer at the New York City comptroller’s office, which manages the city’s pension funds.
She said it was difficult for even large institutional investors to make projections about the “cascading effects that can shake financial stability,” like widespread failures in the mortgage or insurance markets that could ripple across the economy.
Those are the kinds of data gaps that the Biden administration was attempting to fill with policies and workstreams that have since been terminated.
While many companies voluntarily release some information about climate goals and plans, there were no federal standards for those disclosures.
In 2024, the SEC issued a regulation standardizing the way publicly traded companies disclose their vulnerabilities to climate change and any plans to mitigate them. Some large corporations were also required to provide emissions data.
The rule never took effect after companies sued to stop it. Then last year, the independent regulatory commission voted to end its defense of the rule. In May, the SEC issued its repeal proposal on the basis that it didn’t give investors “material” information that would drive investment decisions. The SEC rule wasn’t the Biden administration’s only attempt to shed light on potential market risks from climate change. And most of those have fallen by the wayside since the start of the second Trump term.
In 2023, the Federal Reserve System piloted a scenario analysis to help U.S. banks “identify, estimate, monitor, and manage” climate risks in their lending and investment portfolios. That effort has been discontinued.
The Financial Stability Oversight Council, a regulatory and coordinating body created in the wake of the 2008 financial crisis to anticipate serious financial risks, in 2021 identified climate change as an “emerging and increasing threat to financial stability.” In 2025, the council dissolved its climate-risk committees, though the work continues at think tanks.
Kevin Stiroh, a former senior adviser to the Board of Governors of the Fed, published a blog post in December inventorying those and other federal efforts of recent years to understand and communicate climate-related financial risks. Almost all of those have been mothballed.
That included the so-called Task Force on Climate-related Financial Risks, created in the last year of Trump’s first term within the international body that sets prudential standards for banks, which Stiroh co-chaired.
In an interview with POLITICO, Stiroh lamented that federal policies to improve transparency and fill knowledge gaps had been conflated with unrelated activism around fossil fuels divestment. .
“A risk is a risk,” he said. “It’s prudent and appropriate for financial policy to incorporate [these risks], and that is not a political statement at all. That is a fundamental risk management statement.”
Dire projections
There’s no shortage of dire projections about what climate change could eventually mean to domestic and global economies and equity values.
The latest assessment by the Intergovernmental Panel on Climate Change — the U.N.’s climate science body — expresses high confidence that increasingly severe floods, droughts and wildfires will sap value from housing, infrastructure, supply chains and agriculture.
“[A]n increasingly significant portion of the growing value of financial capital (stocks in particular) may be disconnected from the value of underlying productive capital in the real economy,” it warned in 2023.
The European Central Bank in June reported that droughts and harvest failures could have a “substantial inflationary effect,” with a single crop shock having the potential to increase prices by double digit percentages with “persistent inflationary consequences.” Inflation is associated with stock market declines.
Warming also has the potential to make economies less productive. Research by the Nicholas Institute for Energy, Environment & Sustainability found that heat-related losses to the U.S. economy totaled $220 billion in 2023, nearly twice what they were in 2001. That included $38 billion in productivity losses from the construction sector over those two decades.
A 2022 analysis by the Deloitte Economics Institute found that if global temperatures rose to 3 degrees Celsius later this century the U.S. economy would shed $14.5 trillion, or about 4 percent of gross domestic product, between 2021 and 2070.
Losses to the economy often filter through to the stock market. But high levels of uncertainty around climate impacts make planning especially difficult, said Gernot Wagner, a climate economist at Columbia Business School.
“Here’s what I’m afraid of: It’s going to be much bigger and sooner than most people appreciate,” said Wagner. “But it’ll hit us in surprising ways that you and I can’t predict right now, and that’s of course what makes it even bigger.”
Wagner pointed to 2023, when smoke from wildfires in Canada traveled more than 400 miles to the world’s financial capital, turning the air in lower Manhattan orange and forcing the cancellation of Broadway shows and prompting Wall Street traders to work from home.
“You can model risk, but you cannot model uncertainty, and that’s the problem,” he said.
Climate-related financial risks fall broadly into two categories: “physical risks” — the tangible results of climate-fueled floods, droughts and fires — and “transition risks,” where government policies or market trends favor one set of industries over another.
Physical risks might include company assets or production sites that are susceptible to wildfires or flooding. Supply chains and shipping lanes might be vulnerable to drought or some other event. Or a utility — like Hawaii Electric Industries or Pacific Gas & Electric Co. — might be forced to shell out millions when its equipment sparks a runaway blaze.
Transition risks can also be opportunities. A future administration or Congress may enact policies that put a price on carbon or bolster lower-emissions industries like renewable energy or electric vehicles..
While these risks are generally foreseeable, former regulators say that a lack of federal standards for disclosure means investors don’t have detailed information about how individual companies may be planning for them — perhaps by diversifying supply chains or reducing their own emissions.
“The problem at its root is mispriced assets,” said Herren Lee. “Investors do not have sufficient information to accurately price assets and allocate capital in line with their investment objectives.”
But Robert Litterman, a former head of risk management at Goldman Sachs, said the loss of the SEC rule mattered little because companies are still required to disclose information material to their corporate values, including any vulnerabilities from climate change. And professional investors are paying attention to those risks.
“I don’t see obvious mispricings that are going to be corrected in the short run,” said Litterman, who is also a founding partner of Kepos Capital. “That doesn’t mean there aren’t risks, and in fact, the risks can be growing, but if the exposures are already priced in it does mean that It’s not easy to make money by recognizing those exposures.”
Litterman said policies to price carbon and efforts to improve data about how carbon moves through the economy were bigger concerns for climate-conscious investors than the loss of the SEC climate disclosure rule.
