In June 2019, Rostin Behnam – Commissioner at the U.S. Commodity Futures Trading Commission (CFTC) – announced a Subcommittee of industry executives, academics, and sustainability experts. The Climate-Related Market Risk Subcommittee (the Subcommittee) is tasked with creating a report by the middle of this year to address various topics related to managing climate change risk. In an interview with S&P Global Market Intelligence, Behnam said that he created the group to “gather ideas on how the CFTC and other regulators can work alongside the private sector to address the mounting risks that climate change poses to U.S. and global markets”.
Although the CFTC is not the first US financial services regulator to share concerns about climate change, it is the first to take critical first steps in providing practical guidance.
“Not for the Fed”
Representatives of separate branches of the Federal Reserve have commented on the urgency of addressing climate change but the Federal Reserve Chairman Jerome Powell explicitly stated at the Joint Economic Committee last November that the issue is “not principally for the Fed” and will not be taking action. The view of the US Federal Reserve Chairman is in sharp contrast to the position of other central banks and the G20 Financial Stability Board. This board is an international body of member institutions comprised of central banks, finance ministries, and supervisory and regulatory authorities from multiple jurisdictions that is leading the thought and recommendations on climate change risks.
Leading the charge in the US
The CFTC is the only US regulator taking any action on combating climate change risk. Earlier this month, the CFTC requested comments on climate-risk initiatives. Specifically, the Subcommittee asked for public input in identifying the following:
Challenges to evaluating and managing climate-related financial and market risks
How market participants can improve integration of climate-related analyses into disclosures, market assessments and reporting
Risk management and disclosure policy initiatives and best practices
Methods by which data and analyses can enhance and contribute to assessment of climate-related financial market risks and their impact on various commodities
Financial and market risks arising from policy responses to climate change.
We commend the CFTC for starting the dialogue with market participants. The US is a major player in the global markets and has the ability to affect potential systemic risks posed by climate change. Guidance and policies established by regulators such as the CFTC will encourage transparency and establish integrity in financial markets.
Baringa Partners submitted a white paper in response to the CFTC’s request for comments. We highlight key challenges in managing climate-related risks and share our views on best practices for risk management. More specifically, we stress the importance of effective scenario modelling and what constitutes a state-of-the-art model. We also encourage the Subcommittee to reference existing frameworks from the Bank of England’s Task Force on Climate-related Financial Disclosures (TCFD) and European Commission given that the topics and issues presented by the CFTC are prominent globally and have been addressed with guidance.
We look forward to the release of the CFTC’s report this year and hope to see more engagement from US market participants as a result.
To speak to us about anything climate-related, please email us at firstname.lastname@example.org.
About the authors:
Sophia Chowdhury is a Manager in Baringa's Risk & Compliance Practice, Brad O'Brien is Partner in our New York Office.