The White House is expected to soon issue an executive order on climate change which could require the country's systemic risk watchdog to assess how climate change could hurt financial companies and markets, and to gather and share relevant data.

It could also tell agencies to consider climate change risks when supervising financial firms and to reverse rules introduced by former President Donald Trump's administration which have curbed sustainable investments, according to progressive groups.

Treasury Secretary Janet Yellen, who leads the systemic risk watchdog, on Wednesday pledged to aggressively tackle climate change using all the tools at her disposal. read more

While the executive order is just the first step in what is likely to be a lengthy and contentious rule-writing process, it nevertheless marks a watershed for U.S. climate and financial policy which could have major ramifications for Wall Street.

"It's a real sea change for U.S. financial regulators as they begin promoting transparency into what companies and financing firms are doing to address climate risks," said Ty Gellasch, head of Washington-based Healthy Markets, whose members include major pension funds and banks.

Climate change could upend the financial system because physical threats such as rising sea levels, as well as policies and carbon-neutral technologies aimed at slowing global warming, could destroy trillions of dollars of assets, risk experts say.

In a 2020 report, the Commodity Futures Trading Commission (CFTC) cited data estimating that $1 trillion to $4 trillion of global wealth tied to fossil fuel assets could ultimately be lost.

"In every other aspect of risk management, we expect regulators to establish clear expectations for financial institutions, and to hold them to those expectations," said Brian Schatz, a Democratic senator who has sponsored financial climate risk bills. "It's time for our regulators to apply those tools to climate risks."

After the Trump administration's assault on climate change policy, the United States lags Europe on financial climate risk and is under pressure from countries there to catch up. With a record $51 billion pouring into sustainable U.S. funds in 2020, investors are also pushing for better information on how company balance sheets and earnings could be dented by climate change. read more

Europe requires large companies to disclose risks and data on environmental issues and is introducing sustainability disclosures for investment products. read more

The United States has no climate-specific disclosure rules. It also lacks definitions for key terms like "sustainable," and has no commonly used standards for measuring corporate environmental goals or climate risks.

European regulators have also begun adding climate risks to annual bank exams, a step the Fed has so far resisted.

"While their counterparts overseas have begun developing and implementing policy on climate change, most of the U.S. regulators haven't done anything significant yet," said David Arkush, head of advocacy group Public Citizen's climate programs.

POLITICAL COVER

Officials say the issues are extremely complex and need to be analyzed first. And the Federal Reserve, CFTC and housing finance agency have begun assessing how climate change could affect lenders, trading firms and the markets they oversee.

The securities watchdog is also cracking down on companies and funds that mislead investors over climate issues and is tightening up its current guidance on corporate climate risk disclosures. read more

But progressives want them to impose strict European-style obligations, including detailed disclosures for companies on direct and indirect greenhouse gas emissions, and their total carbon assets. They also want the Fed to test bank balance sheets against specific scenarios, such as a rise by 1 or 2 degrees Celsius in average global temperatures.

Many such measures will be opposed by Republicans and corporate lobbyists, who say Democrats are using financial policy to advance a political agenda.

The U.S. Chamber of Commerce, for its part, supports a "narrow set" of climate change policies which it says should be enacted by Congress, not regulators.

Advocacy groups hope, though, that the White House executive order should provide some political cover for agencies.

"There will be some corporate pushback," said Ilmi Granoff of foundation ClimateWorks. "But this is all the more reason a signal from the president is warranted and important."