Climate change has been a very hot topic over the last few years. It’s always been an important issue, but recently it’s become one of the key talking points and debates in modern society. The Managing Climate Risk in the Financial System report was recently released, having been commissioned by President Trump’s Commodity Futures Trading Commission (CFTC) last year. It has issued stark warnings about the potentially devastating short- and long-term effects that climate change may have on US financial market.
The report – the first of its kind – also lists a number of steps that can be taken to help safeguard markets and lessen the impact that climate change-related disasters may have on them. It was released as wildfires continue to spread in some western states; at the time of writing, half a million people in the state of Oregon have been forced to evacuate their homes.
What’s particularly challenging about climate change is that it isn’t just a single incident that affects everyone at the same time, like COVID-19. Instead, it’s a long-term phenomenon that can affect different areas at different times. While western states are currently experiencing wildfires, next year it could be another part of the country that suffers from climate change, for example. There’s no way of accurately predicting when the next big climate-related incident will happen and how big of an effect it will have on local and national markets.
Key Points in the Report
The report focuses not on the physical consequences of climate-related disasters as such, but on the impact, these things can have on financial markets. Its core message is that regulators must acknowledge the huge risks associated with climate change. They must appreciate just how much of wide-ranging effect things like storms, droughts, wildfires and other similar disasters can have on financial markets. A single disaster can have not only devastating short-term effects but also long-lasting ripple effects that continue to wreak havoc long after the disaster is over. It can also put a significant dent in a country’s long-term economic growth, setting it back months or even years.
According to the report, there’s simply no better time than right now for regulators to step up and start working towards safeguarding financial markets. They should come together and make sure they understand what the current risks associated with climate change are and what can be done to lessen the effects on the markets. Disasters are happening right now, and action is needed urgently.
Potential Solutions
The report offers a number of potential solutions for regulators to consider enacting. Many of these are ones that have been proposed before. The creation of a tax on carbon is an example of a proposal that’s previously been suggested. Others include reforming derivative markets by introducing new contracts and disclosing the climate-related risks that corporations face in a much better and effective way.
An issue that Heath Tarbert, the CFTC’s chairman, brought up was that making too many drastic ‘green’ changes too soon could also be detrimental. He mentioned that transitioning to a greener way of doing things too quickly could have just as disruptive an effect on the country’s core financial system as not doing anything at all. In other words, he believes there has to be a fine balance between the state of the country now and where it’s going to be in the future. The right steps have to be taken at the right time to protect the economy and reduce the negative effects on financial markets.
Getting Things Right
So while the report looks at what can be done in the near future to protect financial markets as the country goes greener, people in all sectors have to be prepared to adjust and adapt. Changes in policies affect companies of all types and sizes, so it’s incredibly important that care is taken to lessen the risks as much as possible. If markets can’t keep up with changes in not only policy but also in technology and consumer preferences, they could end up suffering.
Moving forward, it’s vital that the effects of going green on everyone and every type of business or company are taken into account. The challenge facing policymakers right now is how to move towards a greener way of doing things without sacrificing businesses or any size and without causing too much disruption to financial markets. It may be inevitable that some short-term damage is done, but that may be a small price to pay in the ongoing fight against climate change.
It remains to be seen just what will be done to hopefully protect financial markets and reduce the potential consequences of climate change. The presidential election later this year will no doubt have a significant effect on the country’s approach to going green, with Trump more of a climate change denier and his opponent Biden more in favour of climate change policies.