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Climate change threatens “unprecedented disruption” to the U.S. financial system

September 10, 2020, 11:44 AM UTC

A number of different reports were published this week, all once again outlining the devastating consequences of climate change (more on those below.) But the one that offers perhaps the brightest glimmer of hope is a landmark report from a federal regulator on the systemic risk climate change poses to the U.S. financial markets.

Bear with me.

The report, prepared by an advisory panel to the U.S. Commodity Futures Trading Commission (CFTC), notes that the physical impacts of climate change are already having an adverse effect on material assets in the U.S.—see the wildfires torching the West coast and the hurricanes flooding the East.

The 196-page report also warns that action taken to mitigate these effects—such as pursuing a carbon neutral economy—”may also” impact major segments of the economy.

“Both physical and transition risks could give rise to systemic and sub-systemic financial shocks, potentially causing unprecedented disruption in the proper functioning of financial markets and institutions,” it warns.

So where’s the good news? Well, the good news is that the report was commissioned and written at all. Its publication marks the most substantial review a U.S. federal agency has conducted on the risk of climate change poses to the financial system. And money is a powerful motivator.

Recognizing the economic imperative for adopting sustainable practices is already de rigeur in business. It’s been over a year since the Business Roundtable made its historic shift to endorse “stakeholder capitalism,” in which time myriad companies have published manifestos for achieving “net zero.”

Whether those plans are carried through relies a lot on whether the financial incentives are there to support them. ESG investing is beginning to boom, but the CFTC report hints a more structured ecosystem for green investment is on the horizon in the U.S.

There are some caveats. Although the report is endorsed by all 35 of the CFTC’s members, which includes the likes of Goldman Sachs, Citigroup and JP Morgan, some have said it requires more research. Even the CFTC is reluctant to embrace the report it commissioned—publishing it with a disclaimer that the report does “not necessarily reflect” the views of the CFTC nor the federal government.

Such institutional reluctance to accept the realities of climate change is one reason why the U.S. has lagged so far behind the EU in developing a carbon pricing scheme—something the report says is the primary prerequisite for saving the U.S. financial system from disaster.

Eamon Barrett
eamon.barrett@fortune.com

CARBON COPY

The climate crisis continues

According to a report from United in Science, a subgroup of the UN, the COVID-19 pandemic has not slowed the pace of climate change. "While emissions fell during the peak of the pandemic confinement measures, they have already mostly recovered to within 5 per cent of the same period in 2019 and are likely to increase further," UN Secretary General António Guterres wrote in a foreword. Guterres calls for governments to treat the pandemic as a chance for change, rather than returning to business as usual.

Population collapse

Wildlife populations have collapsed an average 68% over the past 50 years, according to WWF, which released its biennial Living Planet report this week. WWF has monitored 200,000 populations of animal since 1970, documenting their accelerating decline. According to the report—based on the monitoring of 20,000 animal populations—70% of the collapse has been caused by human activity.

Dammed

Water levels along the lower Mekong have dipped to a record low for the second year running. The Mekong springs in Tibet and courses through six countries, including China, before entering the sea in south Vietnam and is an economic lifeline for some 220 million people. Below average rainfall is part of the reason why the river has run so low, but a bigger issue is China damming the upper Mekong to create hydropower plants—an accusation Beijing has frequently disputed.

IN CASE YOU MISSED IT

Why meat could be top of mind for voters in the upcoming election by Paul Shapiro

Tesla’s stock has plunged 34% in one week by Danielle Abril

Europe relies on foreign raw materials to power its green and digital future. Now it wants to mine them at home by David Meyer

Bill Gates–backed EV battery startup to go public using Wall Street’s latest buzzy trick by Aaron Pressman

Trump has long wanted to kill a Russia-Germany natural gas pipeline. Navalny’s poisoning could do it for him by David Meyer

Closing number

1.2 billion

According to the Institute for Economics and Peace, a non-profit Australian think tank, up to 1.2 billion people across 31 countries are at risk of being displaced by climate change over the next 30 years. Worldwide, the U.S. has suffered the highest number of natural disasters over the past 30 years—704—but Pakistan has the most people at risk of becoming climate refugees, with 220 million people in danger of being displaced.