Financial Stability Oversight Council Releases Report on Climate-Related Financial Risk

December 22, 2021

The Financial Stability Oversight Council (“FSOC”) recently released a report on climate-related financial risk (the “Report”).1 The Report identifies climate change as an emerging threat to U.S. financial stability and seeks to improve the ability of consumers, investors, financial institutions, insurers, and other market participants to make decisions that reflect climate-related financial risks. In addition, the Report proposes recommendations for member agencies (including the SEC and CFTC) to help address the challenges posed by climate change.

The Report discusses some of the actions that the SEC has taken regarding climate-related financial risks. These actions date back to 2010, when the SEC issued interpretive guidance in which it “remind[ed] companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.”2 More recently, in July 2021, the SEC chair indicated that staff were developing a rulemaking proposal on mandatory climate risk disclosure by public issuers for the SEC to consider, and in September 2021 the SEC issued a sample comment letter that provided examples of some of the types of climate-related comments the staff might issue in the course of its review of public company filings.3 In addition, the Report explains that the SEC’s Division of Examinations’ 2021 Examination Priorities includes review of investment advisers and funds offering ESG products and services, and the SEC’s Division of Enforcement announced a task force to proactively evaluate potential ESG-related misconduct.

Additionally, the Report highlights climate-related actions taken by the CFTC, which include the establishment of the Climate Risk Unit (“CRU”) in March 2021. The focus of the CRU is to accelerate CFTC engagement on in climate and ESG-related issues. Furthermore, the Report also discusses the CFTC’s Market Risk Advisory Committee (“MRAC”) and its Climate-Related Market Risk Subcommittee, which issued a Report cataloging how U.S. regulators can address the growing impact of climate-related financial risk.4

Ultimately, the Report concludes that climate-related threats to financial stability require its members to take action to expand capacity, improve data and measurement, enhance disclosure of climate-related risks, assess the scale of potential vulnerabilities, and make appropriate adjustments in regulatory and supervisory tools. These actions can strengthen the financial system and make it better able to withstand climate-related shocks and vulnerabilities.

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If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.