Climate Change as Systemic Risk

Abstract

Hindsight tells us that COVID-19, thought by Trump and others to have come out of nowhere, is more aptly labelled a “gray rhino” event, one that was highly probable and one that we had the power to prevent. Indeed, despite considerable evidence of the impending threats of pandemics, for the most part, pandemic preparation was ignored, resulting in wide-scale social and economic losses.

The lessons from COVID-19 however should remind us of the perils of ignoring gray rhino risks. Nowhere is this more apparent than with climate change, a highly probable, high impact threat that has largely been ignored to date. Despite those who deny climate change, there remains ample evidence of the increasing temperature of the earth, which like COVID-19, has the potential not only to create public health emergencies but also to create wide scale, enormous adverse impacts on the economy.

Indeed, the risks posed by climate change to the economy have the potential to be so far-reaching that it should, as this article argues, be termed a systemic risk. As such, the economic implications of climate change need to be mitigated in order to preserve economic stability. This is necessary not only for prudential and economic reasons, but also to protect citizens’ health and safety, and to ensure that business does not exceed the limits of the planet.

While there has been some attention to addressing the economic implications of climate change at the global level, progress in the US has been minimal. This is surprising, not only because climate change has already caused unprecedented damage in certain parts of the country, but also because, to some extent, existing legislation and models may offer the tools to address the systemic risks of climate change. Drawing inspiration from the Dodd-Frank Act, SEC rules, and the FDIC model, among others, this article proposes regulatory approaches for mitigating climate change systemic risks in hopes that COVID-19 does not foreshadow our fate for climate change.

Keywords: climate change, systemic risk, COVID-19, SEC, disclosure, corporate law, financial institutions, sustainable finance, stranded assets, green investments, greenhouse gases, fossil fuels

JEL Classification: K2, K22, K32