March 18, 2021

Toomey: Climate Policy Beyond the Scope of Financial Regulators

Washington, D.C. – U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) today argued that financial regulators should refrain from using their authorities to advance a progressive social agenda on climate change.

In his opening statement during today’s Senate Banking Committee hearing, Senator Toomey warned against unelected, unaccountable regulators imposing financial regulations to substitute political favoritism for private business judgement.

Ranking Member Toomey’s opening remarks, as prepared for delivery:

Thank you, Mr. Chairman.

The title of today’s hearing is, “21st Century Economy: Protecting the Financial System from Risks Associated with Climate Change.” This title begs these questions: Who is supposed to “protect” the financial system from these risks? And how? In the view of my Democratic colleagues, the answers are: The Federal Reserve, SEC, and other financial regulators through new, punitive regulations based on highly uncertain data and models.

Let me offer a different perspective. Just as we wouldn’t task the EPA with auditing corporate books, financial regulation and supervision isn’t meant for advancing environmental policy. As Federal Reserve Chair Powell himself has said, “society’s broad response to climate change is for others to decide—in particular, elected leaders.” If Congress believes current environmental policies do not adequately address climate risks, changes should be enacted through the legislative process—not through financial regulation.

Let’s consider the Federal Reserve. Climate policy is beyond the scope of its mission and authorities. The Federal Reserve was created to be independent and free from political influence. As one of today’s witnesses, John Cochrane, has observed, “A central bank in a democracy is not an all-purpose do-good agency to subsidize what it decides to be worthy, defund what it dislikes, and force banks and companies to do the same.”

The Federal Reserve’s recent actions on climate, however, suggest this is the direction that some at the Federal Reserve would like to pursue. For example, the Federal Reserve’s newly created committee that’s focused exclusively on climate risks raises a number of questions. Although it was announced nearly two months ago, we still do not have any details on its objectives or intended outputs.

Similarly, Federal Reserve Governor Lael Brainard has suggested the Federal Reserve may require banks to engage in “climate scenario analysis,” but she has not provided any specificity on the purpose or rationale for such an exercise. This is in spite of the fact that banks already evaluate their risks and respond accordingly. By straying from its core mission and authorities in support of vague and ill-defined climate goals, the Federal Reserve’s actions threaten to undermine its credibility and betray its independence.

Climate policy is also beyond the scope of the Federal Reserve’s expertise. We know there are significant shortcomings and gaps in climate models and data. The Federal Reserve has acknowledged that historical climate data is insufficient to make accurate predictions of future climate scenarios. And climate researchers have themselves warned that their models are built for 100-year simulations—not projections of the immediate years or even decades ahead.

Given the uncertainty within the climate community itself, why should we believe the Federal Reserve has any greater understanding of climate risks than regulated institutions? The answer: we should not.

One recent paper by a group of climate researchers found that current climate models cannot provide financially meaningful information. The Federal Reserve shouldn’t become a climate soothsayer any more than they should start regulating based on the risk of domestic instability, widespread famine, or other Black Swan events. As one of today’s witnesses, Ben Zycher will explain in more detail, the Federal Reserve is not in a position to navigate the enormous uncertainties and complexities underlying climate models. Financial regulators have no experience or expertise in environmental policy, and any attempt to impose new requirements will only result in the government picking winners and losers.

The Federal Reserve should not follow the example of other regulators engaged in “mission creep,” and nor should the SEC. I’ve warned that many on the Left want the SEC to use its regulatory powers to advance a progressive social agenda on climate change. Now, under the SEC’s Acting Chair, the agency is beginning to do just that. For example, earlier this month, the SEC announced the creation of a “Climate and ESG Task Force” to scrutinize issuers’ disclosure of climate risks. And on Monday, the Acting SEC Chair proposed a chilling and authoritarian idea. She argued the SEC should force companies to disclose any type of political advocacy spending because firms may “state they support climate-friendly initiatives, [but] have donated substantial sums to candidates with climate voting records inconsistent with such assertions.”

Inconsistent according to whom? In other words, these green-friendly companies may support Republicans and that’s a problem. These actions represent an abuse of power and a politicization of the SEC’s disclosure standard. The concept of materiality is the cornerstone of the disclosure-based regime under federal securities law. What matters is whether an issue is financially material to a reasonable investor. Mandating disclosures of non-material climate-related information would undermine this concept and its important role.

The real objective here is to punish politically disfavored industries. By straying beyond their mandates into the climate arena, financial regulators will pressure banks not to serve politically disfavored industries such as fossil fuel companies. Who’s next? Gun manufacturers? Conservative media? Religiously-minded businesses like Hobby Lobby?

This is a wholly inappropriate use of financial regulation and an attempt to substitute political favoritism for private business judgment. Radical policies to force banks to cut off capital to these companies would not have a meaningful impact on the climate, as Dr. Zycher will testify, but would only raise energy costs for consumers.

I began my statement by asking, who is supposed to “protect…the Financial System from Risks Associated with Climate Change,” and how? Or more simply asked, exactly what risks? The major threat to energy-related assets is not financial risk caused by weather-related events. It’s the risk that unelected, unaccountable “Woke” regulators will misuse the levers of power in ways never imagined to remake society according to their politics.

That result—political favoritism caused by regulatory abuse—is what we really need to “protect” the financial system, businesses, and workers from.