The Financial Stability Oversight Council (FSOC) issued its 2023 annual report, noting that escalating climate change-driven disasters are “imposing significant costs on the public and the economy, with economic costs from climate change expected to grow.” Building on its 2022 report and the tumultuous year it has been for climate-related disasters and property and casualty insurance, this year’s report highlights the critical role of the housing market in the financial system and recommends that “agencies collaborate on analysis related to the intersection of physical risk, real estate, and insurance in particular” and discusses how changes in property insurance market coverage could affect mortgage markets.
“It has been two years since FSOC first acknowledged transmission channels linking climate-related financial risks to financial stability; since then the threat has become increasingly clear, requiring urgent action by all FSOC member agencies. The Council has rightly increased attention on the urgent crisis at the nexus between physical risk, housing, and insurance, given the implications for financial stability and the disproportionate impacts on low-income communities and communities of color, and should move swiftly to deepen understanding, and take action to address this intersection,” said Jessica Garcia, senior climate finance policy analyst with Americans for Financial Reform Education Fund. “Additionally, FSOC should appropriately acknowledge the role that financial institutions, including insurers, play in contributing to physical risks from climate change through their continued investment, underwriting, and insuring of fossil fuel expansion, all while simultaneously pulling coverage or raising rates from climate vulnerable communities most impacted by those physical risks.”
On physical risks, the report notes that recent decisions by insurers to withdraw homeowners coverage in California, Louisiana, and Florida “portend the unfortunate reality that more and more borrowers will be faced with renewal concerns or difficulty obtaining affordable initial insurance policies when they buy a home. As coverage becomes inaccessible or prohibitively expensive in a given location, home values may decline there, and fewer loans in the area may be originated…”
On transition risks, the report notes that “the U.S. economy is evolving structurally amid…the transition to less fossil fuel use” and that “the impacts of transition risk may result in added costs for some firms and communities, even as they potentially reduce the overall risk associated with unmitigated climate change.” The Council recommends continued state and federal agency coordination on identifying and assessing climate-related financial risk indicators for banking, insurance, and financial markets to identify financial system vulnerabilities.
A 2021 Presidential Executive Order directed the Financial Stability Oversight Council (FSOC) to address growing systemic climate-related financial risk, part of what the administration dubs a whole-of-government approach to climate change. While the FSOC has made some progress, the U.S. financial sector lags other jurisdictions, with climate-related impacts and systemic risks to financial stability far outpacing FSOC and its member agencies’ responses. The climate crisis is outpacing FSOC’s and regulators’ response to the growing risks.
Issue experts and advocacy groups argue financial regulators must require publicly-available transition and net-zero plans with measurable metrics and targets that don’t rely on unproven technologies or offsets. Regulators must also address the disproportionate impacts of climate change to BIPOC and vulnerable communities, and designate non-bank financial companies – particularly major insurers, private equity firms, and asset managers – for enhanced federal supervision, among other urgent regulatory actions needed to mitigate climate-related financial risk.