Biden’s New Handbook for Greening the Financial System
The Biden administration should factor climate risk into this type of testing, Arkush said. It must first ensure that banks are not faced with too much “physical risk”, the name of the damage caused directly by floods, forest fires and droughts from climate change. (That kind of risk took over California’s largest utility, PG&E, bankrupt in 2019.)
But it should also assess banks on the “transition risk”, the chance that the rapidly changing climate Politics could leave their investments worthless. “If it really looks like the world is going to cut carbon emissions in half by 2030, you could, overnight, see inflammatory sales of fossil fuel assets.” Arkush told me. Then, in addition to dealing with climate change, he said, we might also be facing a financial crisis.
Under Dodd-Frank, the financial reform bill that was passed after the global financial crisis, the government can also run stress tests on financial institutions that are not banks. Ambitious regulators could use the law to determine whether BlackRock, the world’s largest asset manager, or Berkshire Hathaway, one of the country’s largest holding companies, are properly prepared for climate change.
3. Change the rules of the market so that investors have more information on how climate change is affecting their investments.
Right now, the government is forcing companies to disclose various information about themselves in order to help people make investments. He should demand similar information on how companies are contributing and could be affected by climate change, Arkush said, so that investors can both choose the least risky stocks and invest according to their values.
Large investors should also be encouraged to ask their clients about How? ‘Or’ What To invest, he said: if their clients do not want to harm the climate with their investments, asset managers must act accordingly. The government should also generally ensure that investments labeled “green” are genuinely green.
The regulation of climate finance is a hot topic at the moment. In recent months, the European Union has been committed in a strangely meticulous effort to define exactly what types of investments are green. This regulatory regime, called “green taxonomy”, has become about as complicated politically as you can imagine. Is a natural gas plant green? What about a nuclear power station? Each decision foreshadows who will win and who will lose.
It’s almost as if the Continental bureaucrats are creating a climate version of the Napoleonic Code, specifying every possible offense and how it should be punished. The American legal system does not work like that. Here, lawmakers state abstract principles, and then regulators and judges apply them.
This is the ultimate goal of the roadmap. The Biden administration will probably never say This good investment, this bad investment, but it will integrate the climate transition into our existing systems of market governance.