Investors urge regulators to protect vulnerable from climate risk

FHFA is only regulator seen making considerable progress

Led by acting director Sandra L. Thompson, the Federal Housing Finance Agency is the only regulator found to have made considerable progress protecting vulnerable communities from the financial risk of climate change. (Tom Williams/CQ Roll Call file photo)
Led by acting director Sandra L. Thompson, the Federal Housing Finance Agency is the only regulator found to have made considerable progress protecting vulnerable communities from the financial risk of climate change. (Tom Williams/CQ Roll Call file photo)
Posted June 30, 2022 at 6:45am

Impact investors are ramping up their calls to federal agencies to protect financially vulnerable communities from the ramifications of climate change, with a particular focus on updating regulations implementing a 1977 anti-redlining law.

Sustainable finance nonprofit Ceres and the U.S. Impact Investing Alliance, both of which work closely with investors concerned with environmental, social and governance issues, are beating the drum for the country's top financial regulators to ensure that disadvantaged communities and communities of color are accounted for in any analysis on climate-related financial risk.

Of the eight agencies with statutory authority to address the needs of at-risk communities, the Federal Housing Finance Agency is the sole one that has made considerable progress so far on addressing climate change's effects on lower-income communities, Ceres said in a report this week.

In the agency’s draft strategic plan through 2026, FHFA emphasized the intersection of affordable housing and climate change, noting that an increase in the number and intensity of natural disasters could hinder the agency’s work.

“Disaster events such as hurricanes, wildfires, and floods could increase credit risk and credit-related expenses at the regulated entities,” FHFA said in its plan. “Natural disasters tend to [disproportionately] impact the affordable housing stock, and in an economic environment with the high labor and materials costs, rebuilding affordable housing would be a significant challenge.”

Meanwhile, the organization said the Treasury Department, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have made "some progress" on assessing climate risks to financially vulnerable U.S. populations.

The Securities and Exchange Commission, the National Credit Union Administration and the Commodity Futures Trading Commission have either done little work or have failed to disclosed what efforts they have made on the issue, the group said.

“Financially vulnerable communities, which include lower income communities and communities of color, are disproportionately burdened by climate-related physical risks as well as the financial risks that accompany both increasingly devastating climate impacts and the efforts to address climate-related financial risks,” Ceres said.

Review of regulators' progress

The organization's findings come as part of a review of U.S. financial regulators' progress in fulfilling President Joe Biden’s executive order on climate-related financial risk last year. In the May 2021 order, Biden said his administration must study climate risk in the economy "while accounting for and addressing disparate impacts on disadvantaged communities and communities of color."

In recent months, Ceres has advocated for federal agencies to follow through on the key recommendations on mitigating climate risk from an October report from the Financial Stability Oversight Council. Ceres noted that “U.S. federal regulators still lag far behind some of their global counterparts and what science demands” and the country “needs to move faster” to address the material impacts from global warming.

The U.S. Impact Investing Alliance, which promotes impact investing and advocates for supportive policies, echoed similar sentiments in a letter earlier this month to the FDIC. 

"Climate change poses significant and systemic risks to financial stability and the capital markets, and there is growing evidence that failing to act on climate change will have profound negative consequences for the U.S. economy," the alliance’s president, Fran Seegull, told the agency. "Investors and global stakeholders are increasingly calling on financial institutions to measure and manage their exposures to both physical and transition risks."

ESG investors have expressed concerns that the U.S. regulatory environment ensures that the private and public sectors make the net-zero transition equitable in terms of job security, energy infrastructure, insurance coverage and housing.

The FSOC report on climate risk underscored that climate change “disproportionately affects financially vulnerable populations” including lower-income households, communities of color, Native American populations and other disadvantaged communities.

There is an opportunity to close the gap for these communities, Ceres said, by updating the Community Reinvestment Act regulations. The nearly 50-year-old law encourages federally insured banks to meet the credit needs of all parts of the locations they serve, including low- and moderate-income communities.

The Fed, FDIC and the OCC last month unveiled plans to update how they implement CRA after the agency scrapped Trump-administration rules that Democrats said would have weakened the law. One of the biggest changes is that the three agencies included climate resiliency and disaster preparedness within the definition of community development activities.

Those changes caught flak from Senate Banking ranking member Patrick J. Toomey, R-Pa., who said the proposed updates would advance “left-wing environmental goals, something that is wholly outside the remit of the Community Reinvestment Act.”

Democrats and ESG proponents, including Ceres, see the proposal as a critical step to protecting disadvantaged communities from financial ruin in the face of wildfires, hurricanes and floods.

“If these provisions remain in the final rule, financial institutions covered under the CRA will be encouraged to help meet the credit needs of financially vulnerable communities through loans, investments, and other services that allow these communities to prepare for natural disasters or build resilience to future climate-related events,” Ceres said. “Although this proposed rule may have significant impact, we hope all agencies evaluated in this year’s scorecard increase their efforts to address climate risks to financially vulnerable communities.”

Banking regulators should consider whether a financial institution’s efforts to mitigate the worst effects of climate change on disadvantaged communities should be factored into its CRA rating, the U.S. Impact Investing Alliance's Seegull told the FDIC.

“There is significant evidence that climate change disproportionately harms [low- and moderate-income] communities, and banks should incorporate these considerations into their strategic planning to ensure that LMI communities have adequate access to financial services and banking products,” Seegull said.

The banking industry's top trade associations, the American Bankers Association and the Bank Policy Institute, said in separate letters to the FDIC that federal banking agencies should consider how financial institutions could receive CRA credit for work they do to improve the climate resilience of disadvantaged communities.

Bank regulators "should ensure that any future guidance or regulations related to climate related financial risk allows banks to continue providing loans and other financial services to the communities and customers they currently serve," said Alison Touhey, vice president and senior regulatory adviser for financial institutions policy and regulatory affairs at the American Bankers Association.

"We tentatively support providing positive CRA consideration for certain loans and investments intended to address the impacts of climate change, particularly as it relates to low- and moderate-income customers and communities," Touhey added in a letter this month to the FDIC.