On June 12, the U.S. Commodity Futures Trading Commission held a meeting of its Market Risk Advisory Committee to discuss climate-related financial market risks. The committee has no official rule-making powers, but its membership comprises a wide range of market participants and its discussions can have a significant influence on CFTC policymaking.
CFTC Commissioner Rostin Behnam, the MRAC's sponsor, warned in his opening remarks that derivatives markets "will suffer if we do not take action to mitigate the risk of contagion" from current and future costs related to climate change. He added that climate change-related risks to derivatives markets users such as insurance providers, asset managers, pension funds, and commercial banks "cannot be understated."
During the meeting, climate change experts from governmental organizations and non-profits discussed current initiatives underway in the U.S. and Europe, and several industry executives talked about how their organizations are dealing with the impact of climate change on their business operations and investment strategies.
Stacy Coleman, a former Federal Reserve official who is now a managing director at Promontory Group, discussed the work of a taskforce formed by the Financial Stability Board on climate-related financial disclosures, a key element of the new regulatory requirements being developed in this area. Behnam described this work as providing access to data that will enhance how climate-related risks "are assessed, priced, disclosed and managed."
Sarah Breeden, a Bank of England supervisory official who is overseeing the central bank's work on climate change, described the kinds of risks that climate change can pose to financial institutions. She noted that the Prudential Regulatory Authority, the supervisory arm of the BoE, has begun incorporating climate change into its stress testing of insurance companies. She also described the kinds of actions that banking supervisors and market regulators will expect from affected institutions, such as scenario analysis to understand the impact of the transition away from fossil fuels.
Kristin Walters, global chief operating officer of Blackrock's risk and quantitative analysis group, noted that derivatives markets are still very much on a "voyage of discovery" as to what products are effective in mitigating climate-related risk, what relevant information to disclose, and how to best help markets address climate-related risks. The industry is still in "the early days" of finding the right data and developing a tool kit for managing these risks, she said.
Matthias Graulich, chief strategy officer of Eurex Clearing, emphasized the progress that has already been made, pointing to the success of the European Emissions Trading Scheme in reducing carbon emissions and the recent launch of ESG futures in Europe as proof that markets are already developing new tools to help investors apply environmental factors.
Some MRAC members cautioned that whatever the solutions are, they must involve buy-in from the private sector and market participants instead of just a mandate from government.
"As a derivatives trader by training I've found that most of the time with top-down regulation, people find ways to get around them," said MRAC member Isaac Chang, managing director and co-head of trading for AQR Capital Management, at the meeting.
These remarks echo sentiment offered by FIA's President and CEO Walt Lukken earlier in June in his opening remarks at IDX 2019 in London. Lukken highlighted "the power of markets as a catalyst for change," particularly on ESG issues. He pointed to the success of market-based solutions such as a cap-and-trade system to fight air pollution in the U.S. over the last two decades as proof that "when markets and government work together, change can make us, literally, breathe a little easier."
"At a time when we need big solutions to big problems, we need to bring the power of markets to the markets of power," Lukken said.
The MRAC meeting also included a vote to form a subcommittee focused exclusively on examining climate related financial market risk, which will include both existing MRAC members and outside experts.