Fighting the Climate Crisis with Effective Financial Regulation

The US financial system is ill-prepared for a rapid shift to clean energy. The necessary solution to the climate crisis is a transformation unprecedented in speed and scope toward a near-zero emissions economy. However, without proactive guidance from regulators, this transition could create chaos for financial institutions, the system, and the broader economy. For too long, US financial regulators have viewed climate solutions as beyond their jurisdiction and responsibilities. Now, some are finally beginning to act, but they are moving too slowly and contemplating measures that are not strong enough.

In “Unsafe at Any Charge: Why Financial Regulators Should Actively Mitigate Climate-Related Risk,” author David Arkush (Roosevelt Fellow) argues that our current financial system cannot safely proceed on its current course without substantial intervention by regulators. The financial system, he contends, is currently caught between two inverse threats to financial stability—an escalating cascade of climate catastrophes that will soon destabilize financial markets, and the solution to that problem: an unprecedented economic transition to phase out greenhouse gas emissions. The prudent path forward is to reduce the common source of both threats—the financing of fossil fuels far in excess of science-based climate targets.

The report lays out a path to respond to the crisis more effectively, proceeding as follows:

• Section I argues that financial institutions and the financial system do not face mere “risks” from climate change but, in the absence of assertive regulatory intervention, nearly certain harms, the scale and urgency of which are deeply understated in the financial regulatory literature.
• Section II discusses shortcomings of the most commonly considered regulatory responses, although it affirms that all should be used, as each has a role to play.
• Section III proposes recentering the mission of safety and soundness in the face of climate-related risk and deploying a set of related authorities capable of meeting the gravity and urgency of the climate crisis despite the uncertainty regarding its many threats. 

“To borrow a phrase, climate-related risks have rendered the financial system unsafe at any (capital) charge, and it will remain so until financial regulators actively shepherd it through the clean-energy transition,” says Arkush.

About the Roosevelt Institute

The Roosevelt Institute is a think tank, a student network, and the nonprofit partner to the Franklin D. Roosevelt Presidential Library and Museum that, together, are learning from the past and working to redefine the future of the American economy. Focusing on corporate and public power, labor and wages, and the economics of race and gender inequality, the Roosevelt Institute unifies experts, invests in young leaders, and advances progressive policies that bring the legacy of Franklin and Eleanor into the 21st century.

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