Losses tied to climate change could trigger financial system, warns US Treasury Secy

"Climate change is already taking a significant economic toll and could cause extensive losses to the US financial system in the coming years," warned US Treasury Secretary Janet Yellen on Tuesday, March 7 during the first meeting with the Climate-related Financial Risk Advisory Committee (CFRAC). 

Yellen, in her remarks during the advisory board's first meeting, asserted that an advisory board was set up last year by the Financial Stability Oversight Council to bolster U.S. action to minimize climate risk to the economy.

“As climate change intensifies, natural disasters and warming temperatures can lead to declines in asset values that could cascade through the financial system,” she said during the meeting adding that a delayed and disorderly transition to a net-zero economy can lead to shocks to the financial system as well.

Notably, climate-related disasters have caused economic losses through infrastructure damage, disruptions in critical services, and losses in property values, according to a federal government report released last year.

'Tornadoes across the South and intensifying storms on the West Coast indicate that climate change is accelerating'

As the US has experienced an average of nearly eight $1 billion disasters every year over the past four decades, reports suggest that in the past five years, that number has jumped to nearly 18 events annually. Yellen mentioned that these impacts are not hypothetical. 

Speaking about states in the US being victims of natural disasters, Yellen said, "States like California, Florida, and Louisiana have recently endured especially severe storms and wildfires." She further noted how tornadoes across the South and intensifying storms on the West Coast indicate that climate change is accelerating. She said some insurers are raising rates or even pulling back from high-risk areas in response to rising losses.

Further, the US Treasury Secretary said, "This has potentially devastating consequences for homeowners and their property values. Developments like these can spill over to other parts of our interconnected financial system.”

The FSOC, a top US regulatory panel, first identified climate change as an "emerging threat" to U.S. financial stability in October 2021. Since then, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp (FDIC), and the Federal Reserve have issued a number of new regulations on climate-related risk management.

It is worth mentioning that the Biden administration has taken executive actions to address climate risk to the economy including the Securities and Exchange Commission measure that will require publicly traded companies to disclose their greenhouse gas emissions. The agency is now considering scaling back its proposed climate disclosure rule.