How Climate, Finance And Trade Will Intersect In 2021



Robert Holleyman, Himamauli Das and Ryan MacFarlane | Crowell

Beginning in 2021, the U.S. may take policy and regulatory actions that align more closely with efforts undertaken in the European Union, and at international institutions such as the Asia-Pacific Economic Cooperation, or APEC, on the nexus of finance, trade and climate change.

More coordinated and cooperative action may be taken to set high-level standards that will be applied commercially throughout the global economy, regardless of jurisdiction. International institutions are also providing greater focus on the urgency to move the global economy toward a low-carbon trajectory and build climate resiliency.

Financial institutions and corporations should take stock to better understand the range of possible new regulations, the impacts and advantages the rules may have for companies, and the ways in which domestic and international policies may evolve over time. Below, we discuss several areas that finance and trade analysts should be especially mindful of.

Regulatory Actions for Investor Protections

Climate-related financial disclosures will become more commonplace. In November, the U.K. Treasury issued a road map policy paper for its plan to implement mandatory disclosures, aligned with the Task Force on Climate-Related Financial Disclosures, across all sectors of the U.K. economy over the next five years. The task force, in turn, has stressed strong support of the International Financial Reporting Standards Foundation’s proposal to create a new global sustainability standards board.

The European Central Bank also published a guide for financial institutions on transparency on climate risks, and the safe and prudent management of climate- related risks under the existing prudential framework. It also noted that it will ask banks to conduct self-assessments to provide a basis for a supervisory dialogue on climate-related risks.

In the U.S., there is speculation that the U.S. Securities and Exchange Commission may require increased disclosure of potential climate-related liabilities, as well as broader disclosure related to more general environmental, social and governance considerations.

Climate Change-Inclusive Monitoring for Financial Stability

According to the Financial Stability Board, 24 financial authorities around the world consider, or plan to consider, climate-related physical or transition risk as part of their financial stability monitoring. Most are focused on possible changes in asset prices and credit quality. Some are also considering implications for underwriting, legal, liability and operational risks.

In September, a U.S. Commodity Futures Trading Commission subcommittee issued a report on managing climate risk in the U.S. financial system. The first of its kind, the report encourages financial regulators to consider the risks that climate change poses to the U.S. financial system.

The report contains 53 recommendations for financial markets and regulators to address climate change, including calling for coordinated efforts between the CFTC and the SEC to undertake climate risk stress tests.

The Federal Reserve’s November financial stability report stated that the Fed is evaluating and investing in ways to deepen its understanding of the full scope of implications of climate change for markets, financial exposures and interconnections between markets and financial institutions. It will monitor and assess the financial system for vulnerabilities related to climate change through its financial stability framework.

The report stated that Federal Reserve supervisors “expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.”

The Bank of England will initiate a climate-related stress test in 2021 to assess different combinations of physical and transition risks over a 30-year period. The stress tests are intended to help U.K. regulators better understand how the banking and insurance sector will be affected by three different climate scenarios, and to help financial institutions improve their risk management efforts.

Insurance Underwriting and Liability Risk

The insurance industry is increasingly focused on climate-related factors. Different sectors of the insurance industry will have varying considerations. Property and casualty insurers may be more exposed, due to increasing value of property in areas prone to physical risks and increases in severe weather events. Life insurers seek suitable returns on long-term assets in a low interest rate environment and ESG-compliant investments.

Regulators such as the Bank of England and the European Insurance and Occupational Pensions Authority are focused on the implications of climate risk on the industry. The UN Environment Programme Finance Initiative has developed principles sustainable insurance. And the Financial Stability Board has warned that liability risks related to climate are of particular relevance to insurance firms, since some such risks can — at least in part — be transferred by means of liability protection insurance.

In the U.S., insurance regulators are increasingly being pressed to consider physical risks associated with

climate change. In response to devastating wildfires on the West Coast this year, for example, Sen. Diane Feinstein, D-Calif., requested that the U.S. Department of Treasury Federal Insurance Office issue a report on the impacts that increased wildfire risk is having on private insurance markets, with recommendations for ensuring that home, business and commercial property insurance remains available and affordable.

Sustainable Finance

The EU has established a classification system for sustainable activities in its EU Taxonomy Regulation. Other governments may seek to provide a common framework for what can be defined as “environmentally sustainable.” The European Commission has suggested building on its own experience to design a global regulatory framework for sustainable finance.

Trillions of dollars of investment are estimated to be needed to combat climate change. Green bonds, which support funds raised for environmentally friendly projects, are rising in popularity. According to according to Bloomberg New Energy Finance, green bonds raised $271 billion in 2019.

The U.K. plans to issue its first green bond in 2021, and Germany, France and the Netherlands have already issued similar bonds. The EU is creating a green bond standard. Bloomberg reports that “[i]ssuers from anywhere in the world will be able to cite compliance, if their plans are independently verified by an EU-accredited assessor.”

Trade Policy as a Tool

APEC has pushed for collective climate action through its efforts to reduce tariffs to 5% or less on the 54 products in APEC’s list of environmental goods, including products such as solar panels and wind turbines. As APEC chair for 2021, New Zealand will make it a priority to “bring economic efficiency into the environmental response through the further liberalization of environmental goods and services.”

APEC will explore adding new products to the list of environmental goods, and further lowering tariffs. It also plans to consider whether the original definitions agreed for environmental services are still fit for purpose.

The World Trade Organization has also recently launched two initiatives to tackle environmental issues. The new Structured Discussions on Trade and Environmental Sustainability grouping may seek to eliminate tariff and nontariff barriers on environmental goods and services, and address fossil fuel subsidies.

A separate initiative will create a dialogue on plastics pollution, and facilitating more sustainable plastics trade. It could revive the Environmental Goods Agreement negotiations, and set targets for reducing trade in single-use plastics.

Analysts suggest the Biden administration may use U.S. trade policy to combat climate change, by conditioning new trade deals on a partner’s climate commitments, and placing tariffs or a carbon fee on high-carbon imports. The EU is also exploring carbon border adjustment mechanisms, and recently pitched a new transatlantic green trade agenda that could support a wider trade and climate initiative at the WTO.

These developments show that regulators and policymakers across the financial spectrum are already

taking action to address climate risks — and have broad plans to continue to pursue actions at the national and global level to steer markets toward a low-carbon trajectory through greater transparency and incentives.

These actions are likely to accelerate in the coming year, as the Biden administration turns its focus toward a climate agenda, and as the mantle for critical international discussions among the G-20, APEC and the UN Framework Convention on Climate Change is taken up by countries with robust climate agendas and goals.

Robert Holleyman is the president and CEO of C&M International, an affiliate of Crowell & Moring LLP. He formerly served as deputy U.S. trade representative.

Himamauli Das is a senior adviser at C&M International. He formerly served as senior director for international trade and investment at the National Security Council.

Ryan MacFarlane is a director at C&M International. He previously worked at the U.S. State Department. Shelley Su, a senior consultant at C&M International, also contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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