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Climate x FinReg Roundup:
January 28th

This weekly news roundup highlights noteworthy developments at the intersection of climate change and financial regulation.

Insurance

A new study from the Environmental Working Group reveals that the rise in droughts and floods is straining taxpayer-funded crop insurance for farmers. “Drought-related payments skyrocketed from 325.6 million in 1995 to 1.65 billion in 2020”—a tripling of insurance payouts after adjusting for inflation.

• Crop insurance is partly covered by taxpayers through the Federal Crop Insurance Program. According to the EWG, “premium subsidies paid by taxpayers are about 60 percent of total premiums, so farmers pay only 40 percent of the actual cost of their crop insurance policy.”

• “The 10 counties with the most drought-related crop insurance payments were all in Texas, while the Dakotas led the way on payments due to excess moisture.”

• Critics of the current program say it does not sufficiently incentivize farmers to adopt practices that can reduce crop losses. In a news release, the EWG argued that the next farm bill should reform federal policies “to encourage farmers to adapt to climate change and reduce emissions before it’s too late.”

Another report released by Aon finds that Hurricane Ida and other natural disasters contributed to 2021 being the third-costliest year for the insurance industry. The report emphasizes that climate risk disclosures are “here to stay,” and warns insurers that climate risk will affect all aspects of the insurance industry.

European Central Bank

The European Central Bank has launched its first climate risk stress test, which will assess banks’ preparedness for economic shocks arising from climate-related financial risks.

• The stress test will use macro-financial scenarios that reflect possible physical risks, such as heat, drought, and floods, as well as short- and long-term transition risks as countries implement new climate policies.

• Assessments will begin in March, and aggregate results are expected to be published in July 2022.

• The ECB has noted that its inaugural climate stress test “is a learning exercise for banks and supervisors alike. It aims to identify vulnerabilities, best practices and challenges banks face when managing climate-related risk. Importantly, this is not a pass or fail exercise, nor does it have direct implications for banks’ capital levels.”

Institutional Investors

In his annual letter to CEOs, BlackRock founder and CEO Larry Fink offered a defense of “stakeholder capitalism”—a management theory that says corporations should serve the interests of all of their stakeholders, including the communities they serve. Fink’s letter pushes companies to “forge strong bonds with their employees” and to focus on sustainable, long-term growth.

• BlackRock, the world’s largest asset manager, has used its power to pressure companies to address climate-related financial risks. “Within weeks of telling leaders in 2020 that climate change would become a ‘defining factor’ in how BlackRock assessed their companies, many blue-chip businesses announced plans to become carbon-neutral or carbon-negative.”

• Critics from the right have accused Fink of engaging in “woke capitalism” and eschewing fiduciary duties in order to appease environmentalists and other antibusiness activists.

• Critics from the left allege that Fink has done less than he purports to, as BlackRock continues to invest in fossil-fuel companies and other major contributors to climate change.

Other Items of Interest

• A new analysis finds that 97% of commenters support the Department of Labor’s reversal of the Trump-era rules that made it more difficult for ERISA plans to consider ESG factors in investment decisions.

• A group of state attorneys general representing New York, Maryland, California, New Jersey, Massachusetts, and Pennsylvania has urged OSHA to promulgate new standards to protect indoor and outdoor workers from extreme heat, as climate change threatens to worsen the heat stress faced by workers across the country.