Pressure is growing on US regulators to take account of climate change risks to the financial system, as President Joe Biden rolls out his environmental agenda.
The White House is expected to soon issue an executive order which could require the country's systemic risk watchdog to assess how climate change could hurt financial companies and markets.
It could also tell agencies to consider climate change risks when supervising financial firms and to reverse rules introduced by former President Donald Trump's administration which have curbed sustainable investments, according to progressive groups.
Read more: Biden wants 50% cut to US emissions by 2030
Climate change could upend the financial system because physical threats such as rising sea levels, as well as policies and carbon-neutral technologies aimed at slowing global warming could destroy trillions of dollars of assets, risk experts say.
In a 2020 report, the Commodity Futures Trading Commission (CFTC) cited data estimating that $1 trillion to $4 trillion of global wealth tied to fossil fuel assets could ultimately be lost.
While the executive order is just the first step in what is likely to be a lengthy and contentious rule-writing process, it nevertheless marks a watershed for US climate and financial policy which could have major ramifications for Wall Street.
"It's a real sea change for US financial regulators as they begin promoting transparency into what companies and financing firms are doing to address climate risks," said Ty Gellasch, head of Washington think tank Healthy Markets.
"In every other aspect of risk management, we expect regulators to establish clear expectations for financial institutions, and to hold them to those expectations," said Brian Schatz, a Democratic senator who has sponsored financial climate risk bills. "It's time for our regulators to apply those tools to climate risks."
After the Trump administration's assault on climate change policy, the United States lags behind Europe on financial climate risk and is under pressure to catch up. With a record $51 billion pouring into sustainable US funds in 2020, investors are also pushing for better information on how company balance sheets and earnings could be dented by climate change.
Europe requires large companies to disclose risks and data on environmental issues and is introducing sustainability disclosures for investment products.
The United States has no climate-specific disclosure rules. It also lacks definitions for key terms like "sustainable," and has no commonly used standards for measuring corporate environmental goals or climate risks.
European regulators have also begun adding climate risks to annual bank exams, a step the Fed has so far resisted.
"While their counterparts overseas have begun developing and implementing policy on climate change, most of the US regulators haven't done anything significant yet," said David Arkush, head of advocacy group Public Citizen's climate programmes.
The securities watchdog is also cracking down on companies and funds that mislead investors over climate issues and is tightening up its current guidance on corporate climate risk disclosures.
But progressives want them to impose strict European-style obligations, including detailed disclosures for companies on direct and indirect greenhouse gas emissions, and their total carbon assets. They also want the Fed to test bank balance sheets against specific scenarios, such as a rise by 1 or 2 degrees Celsius in average global temperatures.
Many such measures will be opposed by Republicans and corporate lobbyists, who say Democrats are using financial policy to advance a political agenda.
The US Chamber of Commerce, for its part, supports a "narrow set" of climate change policies which it says should be enacted by Congress, not regulators.
"There will be some corporate pushback," said Ilmi Granoff of foundation ClimateWorks. "But this is all the more reason a signal from the president is warranted and important."
- Reporting by Reuters