Slow Road to Consensus: CFTC's Behnam Talks Climate Risk

There was perhaps a certain irony in the fact that as smoke drifting across the US from California’s devastating wildfires reached the nation’s capital, a DC regulator put out an unprecedented report on climate risk. The report, sponsored by Commodities Futures Trading Commission (CFTC) commissioner Rostin Behnam, is the first deep-dive look by a financial regulator at the systemic risk that climate change could pose to the US financial system.

WatersTechnology conducted a wide-ranging interview with Behnam relating to the report, titled Managing Climate Risk in the US Financial System, just after he appeared on a closed panel at the FIX EMEA conference last week. While this is a high-level policy discussion—which might not seem important for a technologist or data professional—Behnam’s gambit will have an effect on future policy making, which will impact on things like the environmental, social, and governance (ESG) market and firms’ regulatory reporting requirements.

Behnam is also quick to say that the industry will have to come together to create cohesive actions to deal with climate change—this can’t just be the CFTC throwing its weight around. 

“The CFTC is an important part of the discussion, but it’s not the only part of the discussion. When I started this effort well over a year ago, obviously there was an absence of examining climate risk in the US. The Federal Reserve at the regional level has done some work, but there hasn’t been a deep dive into climate-related financial market risk,” he says.

Climate of Fear

Behnam, one of two Democratic commissioners at the CFTC, has long said that US financial regulators aren’t doing enough to address the existential threat posed by climate change to the financial system. When CFTC commissioners want to gain insight into how policy could be shaped, they can turn to their advisory committees. Each CFTC commissioner sponsors an advisory committee; Behnam’s happens to be the Market Risk Advisory Committee (MRAC).

In 2019, Behnam convened the Climate-Related Market Risk Subcommittee under the MRAC, a group of 34 representatives from banks including JP Morgan, Citigroup, BNP Paribas, and Morgan Stanely; asset managers Vanguard, Calpers, Allianz Global Investors, and Wellington Management; energy company BP; data providers  S&P Global and Bloomberg; CME Group; as well as farming trade associations, academic research organizations, environmental groups, and government officials.

The report was the outcome of the subcommittee’s work, and they voted 34-0 to adopt its recommendations. Chief among these was the recommendation that the US government put a price on carbon to incentivize the reduction of activities that cause greenhouse gases. But the 196-page report also calls for US financial regulators to collect better data and strengthen their analytics for quantifying climate risk, and to make sure the private sector does the same. It also says regulators should support the development of standardized systems and taxonomies for risk—much as the EU is doing with its own taxonomy.

It’s important to note, though, that while the subcommittee voted unanimously to adopt the recommendations, the vote only sets the tone for future policy discussions, but does not have an immediate effect on financial institutions. 

Get the Data Right

Asked about the CFTC’s potential role in collecting climate data, Behnam seems to bristle a little—again, the report is intended to inform policy throughout the supervisory system, not just at one regulator. He does concede, however, that the CFTC already collects “an amazing amount of information” relevant to its role in risk management and price discovery, including trade data, margin and capital data, and some firm data.

One area where this data is crucial is stress testing. The report describes approaches to climate stress testing being considered by authorities in other countries, and recommends that US regulators should run similar pilots, among others testing balance sheets against a common set of scenarios. It acknowledges, however, the shortcomings of modeling for climate risk. Climate change, after all, brings with it the erosion of long-held certainties, as weather patterns are no longer predictable and climate events like storms, wild fires, and drought are ever more extreme and frequent.

“What the report is focusing on is more how we get better climate data, and that is key,” he says. “If you look at stress testing, that is one big recommendation, stress testing institutions for climate scenarios. And the report recommends it as an important tool. … [Climate data] is imperfect, because this is not a traditional dataset in the sense that we have looked back at what historical patterns have shown us, and based on those historical patterns we can have forward-looking opinions. A huge part of the puzzle of climate change, and why it is such a hard nut to crack, is there is so much uncertainty ahead. We don’t know how everything will play out, which makes stress testing and scenario analysis and predictive models harder to fully rely on.”

A big theme of the report, and a word Behnam often mentions in interviews, is disclosure—where climate is material to a firm’s underlying operations and capital investments, the firm’s financial statements should address them. On the other hand, he says that he would never advocate for the disclosure of CFTC registrants’ sensitive, proprietary data. 

“The recommendations really focus on a lot of what other [countries’] government agencies are doing in terms of the changing climate, and what we are seeing in terms of forward-looking climate events, and how with that data made publicly available and accessible to firms and private citizens, can we make better and more informed decisions about corporate activity, so that both investors can make better decisions, companies can make better decisions, and then regulators have the best possible data so we can assess risk on a forward-looking basis,” Behnam says.

Free ESG Markets

One concern as customers of investment products demand more “green” products, and as ESG investing becomes a hot marketing topic for investment managers, governments have started acting to prevent greenwashing. In the EU, this has resulted in the EU Taxonomy, beefing up the Benchmark Regulation, and adding more disclosure requirements.  

Behnam says the emergence of ESG products and other sustainability-related financial innovation is a natural and desirable market reaction to consumer demand, though the public sector does need to step in with enforceable, common standards.

“We want a free market, and consumers are demanding these products. You’re seeing indexes, you’re seeing private sector standardization happening, which is great. I encourage that to keep happening, but as I said on the [FIX EMEA] panel, there is a need for the public sector to play a role in this. … E, S, and G are all very different things, and we have to parse that out; we have to think about making sure that folks understand what the differences are, what information is available, and how to make the best and most informed decisions.”

The private sector will drive policy here, and he sees the unanimous support from the subcommittee members as evidence that the market itself is asking for more “rules of the road,” he says.

“The report demonstrates that some of the largest stakeholders in the world in financial markets care about these issues, or are taking action with respect to these issues. And if that is the case and they are working across country borders, then you would assume that bar will be raised, and they are going to start implementing these policies across the board. So I am hopeful that in due time we will see more action from the US.”

Bipartisan Efforts

It’s this private sector critical mass that Behnam hopes will gain his efforts support in DC, in an administration that has pulled out of the Paris Agreement and weakened environmental protections at home. Behnam says he is just a commissioner—and, as one of two Democrats on the CFTC’s board, a minority one at that—but with the backing of heavyweights like subcommittee members Citigroup, JP Morgan, and Vanguard, he hopes the other federal agencies will take notice.

“I’m going to focus on what I can do. I’m going to focus on using my position to raise awareness,” he says. “In my view, advancing policy, creating ideas that have legs to run and have a chance of success is driven by large and diverse coalitions. And that is why I thought it was extremely important to convene a diverse group of experts in climate and sustainability, in commercial risk. I am so impressed by the individuals these firms sent—we have risk managers, we have commercial managers, and we have sustainability people. When you can put a coalition like that together and get them to support a policy document that is so big and complex, and so in the weeds, unanimously—I think that says a lot and should push the conversation so that we will have bipartisan support.”

But brokering bipartisan co-operation in Washington does not happen overnight. “It is slower than I would like. But I am telling you, relative to even two years ago, let alone five or 10, the conversation is shifting,” he says. “Already, committees and caucuses are forming in Congress, bipartisan groups are forming. People recognize that the climate is changing; they recognize that things need to be done.”

The report is also important as a message to the international community that there are those in the US federal government who are concerned with climate change, he adds. “We understand there is a lot of work going on overseas that was a driving force for why I did this. … [This report] is a first step, but hopefully it will generate momentum and level the playing field for us between all the work that has been done in the international community.”