Don’t Bank on Catastrophic Climate Change, by David W. Kreutzer and Donna Jackson

The SEC’s Proposed Disclosure Rule Is an Assault on the Finance Industry

Though not very good at a variety of things, Team Biden is single-minded and persistent when it comes to using federal financial regulators to do their bidding with respect to climate change.

For instance, the Federal Deposit Insurance Corporation — which is supposed to make sure banks remain solvent — is currently working on a “Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions.”

This statement and the proposed SEC rule on climate risk disclosure are just parts of the Biden administration’s all-of-government assault on the financing of industries that Team Biden considers undesirable.

Whether bankers at any level or in any place need to create and adhere to climate policies is a different question than whether there might be man-made climate effects. Exposure of physical assets to weather damage is real and significant, but that does not necessarily make it climate damage or a systemic financial threat.

Should bankers worry about the potential risk posed by possible climate change? A recent Federal Reserve Bank of New York staff report asked the question this way: “How bad are weather disasters for banks?” Their answer: “Not very.”

Will this answer change when the climate changes? It’s worth noting what is already changing, and what is not.

Over the past half-century or so, the world has warmed about one-hundredth of a degree centigrade per year. This warming is not constant. There are periods when it warms more quickly, others when the warming is slower and others where the world cools. The sea level is rising by about 3 millimeters per year.

None of these pose a direct threat relevant to financial decisions.

Are these slow changes increasing the frequency of costly extreme weather events? So far, the answer is no. Trends in extreme weather events show little that would affect asset values. Digging into the science chapter of the most recent Intergovernmental Panel on Climate Change assessment report shows there are no long-term upward trends in:

  • Tropical cyclones (hurricanes)
  • Tornadoes
  • Meteorological or hydrological droughts
  • Floods

Though recent U.S. wildfires were devastating, linking them to climate change doesn’t fit long-term data. Other factors, such as forest management, play a bigger role.

The IPCC did note upward trends in intense rainfall events, heat waves, agricultural and ecological droughts (categories not reported in their first five IPCC assessments) and the fraction of all hurricanes considered major.

These trends, however, can be misleading.

For instance, the trend in the number of hurricanes has declined slightly. In particular, the number of minor hurricanes has dropped a little more than major ones. An overall decline in hurricanes is a good thing. Ominous reporting about the rise in the ratio of major to minor hurricanes seems like an almost intentional attempt to mislead.

Heat waves also need more context. It should be no surprise that, as the world warms a degree, there will be an increase in the number of times the threshold for a heat wave is passed. This is not because there are more bouts of hot weather. It is because some very hot weather that would have been less than a degree below the threshold is now above it.

It is also worth noting that, despite the increase in agricultural droughts, world food production has more than doubled since 1980. This highlights the human elements — creativity and adaptability — that alter all considerations.

Though most climate models have had a poor prediction record over the past 30 years, predictions about what might happen decades and centuries into the future still, inexplicably, drive headlines.

The 1970s predictions of disasters from population growth and resource exhaustion were every bit as dire as the current predictions for CO2 impacts. They were wrong.

In the last 50 years, the world population has doubled, and resource extraction has accelerated. Yet the planet is no closer to resource exhaustion than we thought we were back then. More importantly, virtually every measure of human welfare has improved.

Eventually, there may be worsening trends in extreme weather that could impose more severe costs on banking risk. Or maybe not. Does the speculative possibility of additional risk require bankers or regulators to address these risks right now? If so, what should the rules be?

It’s worth noting that Enron and its accountants got into trouble for financial statements out of step with reality. In pursuit of its extreme climate agenda, the Biden administration now wants to mandate essentially the same behavior by requiring potential overstatement of the climate change risks to businesses.

In reality, Generally Accepted Accounting Principles have strict requirements for dealing with material as opposed to nonmaterial risks, as well as known versus speculative risks.

The absence of dispositive trends and the highly speculative quality of future catastrophic climate change claims guarantee that assigning risk to specific entities will be more fiction than fact.

The proposed climate reporting measures and the resulting Enron-quality financial statements will add more confusion than clarity for investors, bankers and citizens. They will make our government less responsive to actual challenges in banking and financial markets, which will, in turn, make our nation and its citizens poorer.


David W. Kreutzer is a senior economist at the Institute for Energy Research. Donna Jackson is the director of membership development for the Project 21 black leadership network. She has worked in accounting, auditing and management roles with Ernst & Young and Marriott International, and was a deputy controller for the Export-Import Bank of the United States. This originally appeared at The Washington Times.

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