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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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CFTC Report: Financial Markets Under Threat From Climate Change

When an advisory panel chartered by the Commodities Futures Trading Commission (CFTC), one of the Trump administration’s regulatory agencies, warns, unanimously, that climate change threatens the stability of our financial markets— that is big news, of the man bites dog variety. What is not news is the immediate White House effort to distance the administration from this CFTC advisory committee’s recommendation. We should have expected that.

Panel members admitted that if President Trump were reelected their conclusions would be ignored. And the chairman of the CFTC, in an attempt to appear even handed, pointed out their report also took note of the risk of financial harm to the fossil fuel industry from too aggressive a transition to a low carbon economy. Meanwhile, in a related vein, the US Department of Labor has been trying to make it illegal for pension fund managers to consider environmental issues when making investments.

The CFTC panel report, Managing Climate Risk in the U.S. Financial Markets, is 165 pages of facts, policy proposals, caveats and charts. Someone will have to condense it into a few pages to influence decision makers, we suspect. But essentially the report says four things: 1) climate change poses major risks to the financial system, 2) regulators do not have full understanding of the issues yet, 3) they need to get up to speed, 4) the financial community can provide solutions, 5) doing nothing has risks too.

As an aside, consider that the neoliberal policy drift of the last fifty or so years, which has united both centrist Democrats and all Republicans is an unbridled faith in free markets. This is important for only one reason. Conceptually it repudiates everything the New Deal stood for. Let free markets take the lead and get the government out of the way. This dominant ideology, we suspect, may give way to more New Dealish policies in order to deal with the problems cited in the report.

Let’s return to the report’s recommendation. The easiest neoliberal remedy for climate change is carbon pricing which places the job with the Congress. Orderly markets can’t work without proper prices. But understand that hasty government policies could lead to “disorderly pricing of assets”. (That seems like a warning to policymakers to do something but not be too aggressive.)

The report also cautions to watch out for systemic and sub-systemic risks (meaning that a particular sub-sector of finance or the economy could be hit hard). Recognize that we are in an early stage of dealing with this. We don’t have enough information and we need more data. (Commissioning long term studies of this sort is the policy equivalent of taking a nap.) Related: Citi Bank Sees $60 Oil In 2021

The report also tentatively advises that policymakers conduct scenario analyses but they should also know the limits of these data extrapolation exercises. In a way we thought this was the most radical recommendation of the report. They are admitting implicitly that this could be worse (or better) than we presently expect. As a consequence we need more and better disclosure of climate risks.

Not surprisingly the CFTC panel defends Environmental-Social-Governance (ESG) investing and argues against the notions that ESG investing produces lower returns or that the market for ESG securities is small. Derivative markets (the purview of the CFTC) can also play a role in climate risk mitigation. And, finally, the U.S. should participate in international efforts involving climate issues. (Well, not exactly worded that way, but nevertheless a courageous stand for a report coming out of an administration that has pointedly removed the US from international efforts.)

The report, as far as we can discern breaks no new ground. But it provides a thorough (if not encyclopedic) assessment of market related climate risks. We view this as prepared testimony for when the CFTC actually is called on in the future to do something.

It also reminds us of when one of the authors prepared testimony for a regulatory agency which cited an article in a popular journal. An agency staffer asked why the article was not included in the testimony. The author replied, “Well, it’s out there for all to see. Don’t the commissioners read anything?” And the staffer replied, “If it is not in the record, it doesn’t exist.” Sooner or later, this report too will go into the record as justification for whatever the CFTC does. That’s how we read it. Anyone with interest in the topic should get and read a copy of the original, before the predigested versions arrive on the desks of commissioners or corporate CEOS or Green New Dealers.

Finally, all of us who have participated on panels of this sort (somewhat like juries) know that unanimity comes about either because all participants have been selected for their preconceived notions. Or it is because the panel only agrees to the most obvious statements, puts in caveats to protect participants from backlash and carefully avoids any and all “elephants” in the room.

We think the CFTC’s report on climate change will be a bit like the psychologist’s Rohrschach test. All prior policy views will receive confirmation, left, right and center. In a way this document is also a remarkable testament to bureaucratic and organizational attempts at survival. Whichever way the upcoming Presidential election goes, this document can be “spun” accordingly. But in conclusion we should point out there was one aspect to this report that we did find truly alarming.—an utter absence of any sense of urgency. That is the elephant in the room.

By Leonard Hyman and William Tilles for Oilprice.com

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