What’s ahead for climate finance in 2023

By Avery Ellfeldt | 01/03/2023 06:27 AM EST

Commodity Futures Trading Commission Chairman Rostin Behnam.

Rostin Behnam, chair of the Commodity Futures Trading Commission, testifies Dec. 1 before the Senate Agriculture, Nutrition and Forestry Committee. The CFTC this year plans to take a closer look at the voluntary carbon market. Chip Somodevilla/Getty Images

U.S. regulators laid the groundwork last year to address the threats that climate change poses to the global financial system.

This year could see those efforts bear fruit.

Success will depend on how quickly agencies such as the Securities and Exchange Commission can finalize the climate-related policies they outlined in 2022, as well as the level of resistance they face in Congress and the courts. The outcome could fundamentally reshape how the U.S. economy responds to the consequences of a warming planet.

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Last year was the “year of proposing and planning,” said financial regulation expert Todd Phillips, founder of Phillips Policy Consulting LLC, a progressive consulting firm. And so this year “we should reap the benefits.”

Here are the top issues to watch on climate-fueled financial risk in 2023.

SEC rules

The SEC last year proposed three rules that aim to provide investors with more clarity into companies and their climate-related financial risks, as well as investment options that purport to account for social and environmental issues.

Some big questions moving forward are when those rules will be finalized and enforced — and what the finished versions will look like.

Perhaps the most contentious rule would require public companies to disclose their greenhouse gas emissions, as well as their climate-related risks, plans and strategies. The new approach would overhaul the corporate disclosure process.

The other two rules aim to put guardrails around what types of investment products can be categorized as green; sustainable; or environmental, social and governance (ESG) funds. Those types of products have exploded in popularity as investment firms race to meet public demand for sustainable investment options, sparking fears that some funds are mislabeled to attract more customers.

Now that the climate disclosure and ESG rules’ comment periods have ended, the SEC’s current job entails working through the thousands of submitted comments, writing a final rule and making a case for why they are both necessary and legally defensible.

The SEC did not respond to questions about the timeline moving forward. Climate disclosure experts and advocates say there’s no way to say when the agency will finish and enforce the rules. But some think it’s likely to happen this year.

“I would expect to see it sometime this year. I know the SEC is trying to do a lot, but they’ve indicated in the past that this is a really high priority for them. And if it’s a high priority, they’re also going to want to be the ones to defend it [in court] during the Biden administration,” said Corinne Snow, counsel at Vinson & Elkins LLP who focuses on environmental law and regulatory compliance.

There are several factors that complicate the timeline. For starters, SEC Chair Gary Gensler has embarked on an ambitious rulemaking agenda — proposing 26 new rules in the first eight months of 2022 — when compared to his predecessors, according to the agency’s Office of Inspector General. The intense workload has the potential to slow the agency’s progress.

But the main challenge is the sheer volume of feedback the agency has received on these issues. While many investors, outside groups and Democratic lawmakers are in favor of the rules, the agency has faced intense pushback, too. The opposition likely will lead to legal challenges, which have the potential to delay implementation even after the final rule is released.

Working in the agency’s favor: a growing consensus among investors, regulators and companies around the world that climate change poses substantial financial risks that merit additional clarity.

“I don’t see that slowing down,” said Kristina Wyatt, senior vice president of global regulatory disclosure at carbon accounting company Persefoni, who previously was a senior counsel for climate and environmental, social and governance at the SEC.

Climate guidance

The three major banking regulators over the last year proposed near-identical guidance that lays out how they expect major U.S. banks — with more than $100 billion in assets — to manage their exposure to climate change (Climatewire, Dec. 5, 2022).

The proposal makes clear that the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. want the largest lenders to assess and limit their exposure to climate impacts and the clean energy transition.

That’s the case, the FDIC said, because climate change poses a “clear and significant risk to the U.S. financial system and, if unmitigated, may pose a near-term threat to safe and sound banking and financial stability.”

Each agency issued its own request for comment. While the OCC and FDIC’s comment periods ended in February and June, respectively, the Federal Reserve’s won’t wrap up until next month.

The next step for these regulators will be working through the comments and releasing a final version of the guidance to make clear future expectations.

Fed scenario analysis

The Fed also is set to do something else — kicking off its first-ever exercise meant to gauge major banks’ preparedness for the financial realities of a warming world.

Central bank officials said in September that beginning in 2023 it would require the country’s six largest banks to undergo “pilot climate scenario analysis,” which are meant to provide clarity into how the lenders are thinking about climate-fueled risks (Climatewire, Sept. 30, 2022).

Fed officials have emphasized that the exercise would not have direct consequences for the lenders, which include Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co.

Still unknown, however, are when the tests will begin and what they might entail. The Fed said the exercise would end in late 2023, but other details are still up in the air.

Some outside experts expect the Fed will design several climate scenarios, such as a future in which no meaningful steps are taken to curb global warming. The banks then would assess how their balance sheets would perform in those hypothetical situations.

CFTC

The Commodity Futures Trading Commission may also get it in on the action.

The agency, which regulates U.S. derivatives markets, said in June it plans to take a closer look at the $1 billion voluntary carbon market that allows companies to offset their planet-warming emissions by investing in green projects.

CFTC Chair Rostin Behnam has acknowledged the markets’ capacity for fraud and other abusive practices as companies race to green their operations and reputations — and in some cases purchase offsets that don’t result in the emissions reductions they advertise.

What Behnam has not said is how the agency might get involved. But the agency held a daylong event in June to gather insight from experts and it issued a formal request for public comment (Climatewire, June 3, 2022).

The comment period closed in August.

Though the CFTC hasn’t provided additional information about how it’s thinking about the issue, Phillips Policy Consulting founder Phillips, a former director at Citizens for American Progress and attorney at the FDIC, said he expects the agency would release a proposal that builds off the public input.

“The question is, are they going to just tackle the offset market, or are they going to tackle the problem of offsets themselves,” Phillips said.

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