New Guidance for Financial Regulators as US Energy Transition Quickens

New York, NY — Major US banks, including JPMorgan Chase & Co. and Bank of America Corp., have pledged to reach net-zero emissions by 2050—but their business practices do not align with this commitment. As banks proceed with massive investments in fossil fuels, it’s clear that they will not voluntarily mitigate the substantial and increasingly urgent financial risks they face from climate change and the quickening clean energy transition.

Financial regulators must play a role in ensuring that banks’ operations align with their stated commitments, argue authors David Arkush (Roosevelt Institute fellow and director of Public Citizen’s climate program) and Yevgeny Shrago (policy director of Public Citizen’s climate program) in their new report for the Roosevelt Institute and Public Citizen, Supervising the Transition: How Banking Regulators Can Address the Coming Shift to Net-Zero Emissions. Failure by banks to meet their climate commitments should create serious concerns over how risky the bank’s assets are and how well their management can implement strategic objectives. In order for regulators to fulfill their oversight role and protect the stability of our banks—and our entire financial system—Arkush and Shrago urge agencies to take stronger and more decisive action to hold banks accountable for their public commitments.

The authors propose regulators do the following to ensure that banks are operating responsibly:

• Assess banks’ climate commitments and transition plans to measure the level of risk their assets face from the energy transition, as well as management’s ability to build and implement such plans;
• Provide banks with detailed guidance on how their supervisors will assess alignment of internal strategy and public commitments; and
• Direct banks to adopt comprehensive net-zero transition plans that address the systemic risk of banks’ contribution to climate risk.

Insight from the authors:

“Our energy transition is underway and increasing in speed thanks to the investments of the Inflation Reduction Act,” says Shrago. “If banks and regulators don’t start preparing, this inevitable and necessary shift in our economy may threaten the stability of our financial system.” 

“United States regulators are woefully behind their European counterparts when it comes to taking seriously the financial threat we’re facing as a result of climate damages and the clean energy transition,” says Arkush. “Some US regulators at the state level are already encouraging transition plans for banks; it’s time our federal regulators follow suit.”  

This report reflects Roosevelt’s latest analysis of and suggestions for addressing climate financial risk. It synthesizes arguments from Arkush’s foundational report on the issue, Unsafe At Any Charge: Why Financial Regulators Should Actively Mitigate Climate-Related Risk, and Arkush and Shrago’s subsequent report, Looking over the Horizon: The Case for Prioritizing Climate-Related Risk Supervision of Banks, which made the case for regulators to use supervisory oversight as a tool for mitigating climate risk to our financial system.