Biden’s ‘Climate-Resilient Economy’ Roadmap Is Largely Superfluous
The Biden administration believes that private companies and markets are not effectively pricing into their calculations the effects of man-made climate change on housing, stocks and bonds, physical assets, crop yields, and fire risks. Consequently, President Joe Biden has issued Executive Order 14030 on Climate-Related Financial Risk.
Pursuant to that executive order, Biden’s National Economic Council published A Roadmap to Build a Climate-Resilient Economy. The Roadmap is necessary, asserts the council, because “Wall Street financial models and investment portfolios that manage the assets of millions of Americans continue to rely on the basic assumption that climate will be stable.” The report outlines a “climate risk accountability framework” with the aim of “safeguarding the U.S. financial system against climate-related financial risk by holding financial institutions accountable for properly measuring, disclosing, managing, and mitigating climate-related financial risks.” That emphasis is in the original.
But are Wall Street and other investors blithely assuming a stable climate? Actually, no. There is plenty of evidence that portfolio managers, bond markets, businesses, farmers, and shareholders are taking the effects of climate change into account when planning their investments. On the other hand, government interference in markets is slowing financial and infrastructure adaptation to the risks of climate change.
For example, a March 2021 report on climate change and asset prices by researchers at the private investment firm Dimensional Fund Advisors outlines how various market actors are responding to the risks posed by climate change. That report cites a 2020 study that found that counties and municipalities with greater exposure to sea level rise must pay higher yields on their long term bonds. A 2019 study reported that houses exposed to sea level rise “sell for approximately 7% less than observably equivalent unexposed properties equidistant from the beach.” Another 2019 study parsing trends in the Chicago Mercantile Exchange weather futures contracts concluded, “the evidence shows that financial markets fully incorporate climate model projections.” The authors of that study added, “at least so far, climate models have been very accurate in predicting the average warming trend that’s been observed across the US. When money is on the line, it is hard to find parties willing to bet against the scientific consensus.”
The Dimensional report also references a 2019 Swiss Finance Institute study that found that since the 2015 adoption of the Paris Climate Change Agreement, banks around the world have been increasing the rates they charge fossil fuel companies for their loans. Their concern is that the transition to no-carbon energy supplies risks making the reserves of coal, natural gas, and petroleum worthless. “Overall, a growing body of evidence shows that prices across many different markets (stocks, bonds, climate futures, equity options, and real estate) incorporate information about climate risk,” conclude the Dimensional researchers.
The Biden Roadmap approves of moves at the Securities and Exchange Commission (SEC) to develop a mandatory disclosure rule for publicly traded companies that would supposedly “bring greater clarity to investors about the material risks and opportunities that climate change poses to their investments.” This SEC effort is mostly a following indicator since an increasing number of companies are already disclosing that sort of information. Earlier this year, Bloomberg Law reported that 342 of t
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