Letter to Secretary Steven Mnuchin, Secretary of the Treasury - Rep. Mike Levin, Sen. Brian Schatz Lead Letter Calling on Secretary Mnuchin to Address Climate Crisis Threats to Financial System

Letter

Dear Secretary Mnuchin:
As Chair of the Financial Stability Oversight Council (FSOC), you have a statutory
responsibility to, among other things, "respond to emerging threats to the stability of the United
States financial system."1 There is a compelling body of research, and emerging international
consensus, that recognizes climate change as a serious risk to financial institutions and markets.
2
We write to ask what steps you, in your role as Chair of the FSOC, have taken to address these
risks to our financial system.
Established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the FSOC
is responsible for identifying and mitigating threats to financial stability and improving the
coordination among the disparate financial regulatory agencies. The FSOC has the authority to
research and report on risks to the financial system, issue non-binding policy recommendations
to member agencies to mitigate identified risks, and to designate nonbank financial companies as
systemically important--subjecting them to enhanced regulatory supervision and financial
safeguards. While performing these important functions, it is critical that the FSOC consider
climate-related risks to the financial system.
The United Nations Intergovernmental Panel on Climate Change (IPCC) has found that without
rapid, unprecedented changes to all sectors of society, we cannot limit global warming to 1.5˚C
and prevent sea level rise, polar ice cap melting, and habitat destruction.3 Our financial system
must be resilient in the face of the physical and transition risk-related losses that climate change
could inflict. If a climate shock destabilizes the financial system, businesses and households
would bear the severe economic costs that financial crises impose. By not addressing these risks
now, the FSOC is leaving our financial system and economy vulnerable.
We have already begun to see the physical risks our financial institutions will face from an
increased number of extreme weather events and lasting environmental changes. Between 1980
and 2019, the United States suffered an annual average of 6.5 weather events costing over $1 billion each. In 2019, the number of costly weather events rose to 14.
4 Financial institutions'
mortgage, commercial real estate, business lending, derivatives, and other portfolios are exposed
to these physical risks. Furthermore, these accelerating physical risks--or the realization of an
imminent policy intervention to mitigate them--could spark a volatile market correction.
Financial institutions and investors may try to sell assets tied to carbon-intensive industries at
fire-sale prices, inducing severe price shocks.5 Some financial institutions are beginning to
recognize the importance of combatting climate change and have committed to aligning their
businesses with the goals set forward in the Paris Agreement.6
Banks, credit unions, insurance companies, asset managers, and other nonbank financial
companies are all exposed to these risks. The size, scale, and scope of both physical- and
transition-related risks make climate change a textbook systemic risk.7
If the financial system is
not prepared to withstand these risks safely, a climate shock could seriously disrupt the financial
system and trigger a financial crisis. These climate-related risks do not discriminate based on a
financial institution's regulatory charter, making it critical for the FSOC to organize and oversee
a coordinated regulatory response across the financial regulatory landscape.
Under your leadership, the FSOC has simply failed to act. Despite significant international
momentum on this issue, the FSOC's 2019 Annual Report failed to mention the systemic risk
climate change poses to our financial system--just like each previous annual report published
during your tenure.
8 Not once has climate change been an agenda topic at an FSOC meeting, nor
have you issued any recommendations to regulators or Congress on ways to mitigate the
financial stability threat posed by climate change. Moreover, instead of integrating climate risk
as a factor when considering whether to designate a nonbank financial company as systemically
important, you have shelved the designation authority altogether.9
After seeing the impact that the COVID-19 pandemic has had on our nation's economy, and the
extraordinary measures the Federal Reserve and Department of Treasury were forced to take to
stabilize financial markets, we believe it is more important than ever to prepare for future
external shocks. While epidemiologists predicting an infectious disease pandemic could not
foresee the precise consequences of COVID-19, the risks from climate change are well known,
highly probable, but still inaccurately priced. We can act now to address the economic impact of
climate change using the projections made by climate scientists and climate economists.
We urge you, as Chair of the FSOC, to prepare our financial system for the next crisis and
consider climate risk when responding to emerging risks to the stability of the United States'
financial system. We look forward to your response.

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