At John Cochrane’s blog readers can access studies showing how activists like Mark Carney are distorting and exploiting imaginary risks to the financial system from global warming/climate change.  Firstly Cochrane discusses a current Federal Reserve research document How Bad Are Weather Disasters for Banks?   Excerpts in italics with my bolds and images are from his blog article Fed Courage

How Bad Are Weather Disasters for Banks?

Kristian S. Blickle, Sarah N. Hamerling, and Donald P. Morgan

Federal Reserve Bank of New York Staff Reports, no. 990 November 2021

Abstract

Not very. We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts.

Key words: hurricanes, wildfires, floods, climate change, weather disasters, FEMA, banks, financial stability, local knowledge

In addition to the paper’s good analysis, there is a useful literature review,

Our main findings are generally consistent with the few papers that study the bank stability effects of disaster. Looking across countries, Klomp (2014) finds that disasters do not effect default risk of banks in developed countries. Brei et al. (2019) find that hurricanes (the most destructive weather disaster) do not significantly weaken Caribbean banks. Koetter et al. (2019) finds increased lending and profits at German banks exposed to flooding along the Elbe River. The study closest to ours by Noth and Schuewer (2018) finds default risk increases at U.S. banks following disasters but the effects are small and short-lived. Barth et al. (2019) find higher profits and interest spreads at U.S. banks after disasters but did not look at bank risk.

Based on four case studies of extreme disasters and small banks, FDIC (2005) concluded that …”historically, natural disasters did not appear to have a significant negative impact on bank performance.”

This is a courageous paper to write, and to write so clearly. The fantasy of “climate risks to the financial system” is passed around and around in order to justify using financial regulation to implement this Administration’s climate policies, centering on defunding fossil fuel development and subsidizing deployment of particular technologies such as electric cars and windmills. Documenting that this particular emperor has no clothes takes great courage.

As a small indicator of the forces at work, Treasury Secretary Janet Yellen offered an eloquent summary of a the “whole-of-government’ effort to integrate climate into financial regulation

“FSOC is recognizing that climate change is an emerging and increasing threat to U.S. financial stability. This report puts climate change squarely at the forefront of the agenda of its member agencies..”

News that climate change is not a threat to financial stability will not go down well.

Governor Lael Brainard, currently a leading candidate for Fed Chair, is a strong proponent of “climate risks to the financial system.” = Just read here speeches. Here, for example,

Climate change is projected to have profound effects on the economy and the financial system, and it is already inflicting damage.

We can already see the growing costs associated with the increasing frequency and severity of climate-related events.

Here,

It is increasingly clear that climate change could have important implications for the Federal Reserve … Given the implications of climate change for both individual financial institutions and the financial sector as a whole...,

Climate change and the transition to a sustainable economy also pose risks to the stability of the broader financial system. …

And a hint of the vast institutional commitment to these ideas

To complement the work of the SCC, the Federal Reserve Board is establishing a Financial Stability Climate Committee (FSCC) to identify, assess, and address climate-related risks to financial stability.

“We looked and there is nothing here” is not going to go down well. It’s hard to publish papers and get jobs as climate and finance researchers these days if you come up with the “wrong” answers.

New Zealand Study Confirms Financial System Safety from Climate Change

A commenter at the blog provided a link to another recent NZ study Climate Change and the risk to Financial Stability.  Reality or overreaction? Excerpts in italics with my bolds.

The Reserve Bank is not alone in suggesting that climate change could represent some kind of existential threat to the financial system. Over recent years a number of central banks, supervisors and international financial institutions have made claims that global warming poses a serious risk to financial stability. The Network for Greening the Financial System (NGFS), a club of central banks and supervisors, is pushing a more coordinated international approach. Further, the Ministry for the Environment (MfE) has identified financial stability as one of the two major economic risks in its recent Climate Change Risk Assessment report.

At first sight it is difficult to understand what is driving the Reserve Bank’s concern. The physical risks from climate change to the New Zealand economy are small, and over the period up to 2100 the benefits of a warmer climate may well exceed the costs. While there will be some impacts as the economy adapts to a zero carbon future, economies have always been changing and, with some exceptions, financial systems have been able to accommodate those changes. To cite an obvious example, the US substantially shifted from horse to motorized transport in the space of 20 years, without any one being in charge or worrying about systemic risk to the financial system.

As the physical effects of climate change are slow-moving and relatively predictable over relevant time horizons, we should expect the financial systems to adapt to this changing world, and readily accommodate the impacts of climate events such as a slowly rising sea levels and the occasional stronger storms.

The issue we address in this report is whether climate change is such an exception to this benign adaptation picture, that central banks and supervisors need to respond to the ‘challenge’ with some urgency. Or is this just a case of the Reserve Bank wanting to be seen to be ‘relevant’ and getting into the action in what is one of the biggest issues of our time?

The main purpose of this report is to assess the papers on the Bank’s list and other relevant documents on the impact of climate change on financial systems. We have also focused on climate change risk disclosures, which have become a flavour of the month in regulatory quarters, and are set to become mandatory for larger New Zealand institutions.

The focus of our analysis is on the banking sector, which is the core of the New Zealand financial system. We have paid less attention to risks to the insurance sector because it is generally accepted it can readily manage climate risks by adjusting its exposures and pricing.

Our conclusions are very clear. We have reviewed a large number of documents and despite the best efforts of many supervisors none have been able to come up with convincing evidence that climate change represents a threat, let alone a systemic threat. For example a very recent full scale stress test for France found that the transition costs to a zero carbon economy would at most be four or five basis points and that it did not matter whether the transition was early or late. The physical risks from climate change were so slight that they could not be analysed.

We did find a disturbing pattern of exaggerations and misrepresentations. For example the Bank of England instructed banks, when stress testing, to assume that all river flooding defences would be removed, in an effort to inflate the costs of future flooding events. The United Nations Environment Programme used climate change assumptions for 2100 to assess financial system impacts for 2025 and 2045.

Climate change does not represent some kind of existential threat to the New Zealand financial system.

The Governnor is over-reacting. This climate change ‘hysteria’ is mostly noise, but it might have some efficiency costs for the system, which could be avoided if a more measured approach is taken. The Reserve Bank’s role should be to correct and hose down ill-informed responses, not to create them.

Footnote:

Background from John H. Cochrane writing on central banks mistaken preoccupation with global warming/climate change at post Deception: Climate Financial Risk

Also Cochrane’s remarks at European Central Bank’s Conference on Monetary Policy. Synopsis at post Bankers Should Mind Their Own Business, not the Climate

John H. Cochrane writes at Project Syndicate The Fallacy of Climate Financial Risk.  Excerpts in italics with my bolds.

The idea that climate change poses a threat to the financial system is absurd, not least because everyone already knows that global warming is happening and that fossil fuels are being phased out.
The new push for climate-related financial regulation is not really about risk; it is about a political agenda.

In the United States, the Federal Reserve, the Securities and Exchange Commission, and the Department of the Treasury are gearing up to incorporate climate policy into US financial regulation, following even more audacious steps in Europe. The justification is that “climate risk” poses a danger to the financial system. But that statement is absurd. Financial regulation is being used to smuggle in climate policies that otherwise would be rejected as unpopular or ineffective.

“Climate” means the probability distribution of the weather – the range of potential weather conditions and events, together with their associated probabilities. “Risk” means the unexpected, not changes that everyone knows are underway. And “systemic financial risk” means the possibility that the entire financial system will melt down, as nearly happened in 2008. It does not mean that someone somewhere might lose money because some asset price falls, though central bankers are swiftly enlarging their purview in that direction.

In plain language, then, a “climate risk to the financial system” means a sudden, unexpected, large, and widespread change in the probability distribution of the weather, sufficient to cause losses that blow through equity and long-term debt cushions, provoking a system-wide run on short-term debt. This means the five- or at most ten-year horizon over which regulators can begin to assess the risks on financial institutions’ balance sheets. Loans for 2100 have not been made yet.

Such an event lies outside any climate science. Hurricanes, heat waves, droughts, and fires have never come close to causing systemic financial crises, and there is no scientifically validated possibility that their frequency and severity will change so drastically to alter this fact in the next ten years. Our modern, diversified, industrialized, service-oriented economy is not that affected by weather – even by headline-making events. Businesses and people are still moving from the cold Rust Belt to hot and hurricane-prone Texas and Florida.

If regulators are worried even-handedly about out-of-the-box risks that endanger the financial system, the list should include wars, pandemics, cyberattacks, sovereign-debt crises, political meltdowns, and even asteroid strikes. All but the latter are more likely than climate risk. And if we are worried about flood and fire costs, perhaps we should stop subsidizing building and rebuilding in flood and fire-prone areas.

Climate regulatory risk is slightly more plausible. Environmental regulators could turn out to be so incompetent that they damage the economy to the point of creating a systemic run. But that scenario seems far-fetched even to me. Again though, if the question is regulatory risk, then even-handed regulators should demand a wider recognition of all political and regulatory risks. Between the Biden administration’s novel interpretations of antitrust law, the previous administration’s trade policies, and the pervasive political desire to “break up big tech,” there is no shortage of regulatory danger.

To be sure, it is not impossible that some terrible climate-related event in the next ten years can provoke a systemic run, though nothing in current science or economics describes such an event. But if that is the fear, the only logical way to protect the financial system is by dramatically raising the amount of equity capital, which protects the financial system against any kind of risk.

Risk measurement and technocratic regulation of climate investments, by definition, cannot protect against unknown unknowns or un-modeled “tipping points.”

What about “transition risks” and “stranded assets?” Won’t oil and coal companies lose value in the shift to low-carbon energy? Indeed they will. But everyone already knows that. Oil and gas companies will lose more value only if the transition comes faster than expected. And legacy fossil-fuel assets are not funded by short-term debt, as mortgages were in 2008, so losses by their stockholders and bondholders do not imperil the financial system.

“Financial stability” does not mean that no investor ever loses money.

Moreover, fossil fuels have always been risky. Oil prices turned negative last year, with no broader financial consequences. Coal and its stockholders have already been hammered by climate regulation, with not a hint of financial crisis.

More broadly, in the history of technological transitions, financial problems have never come from declining industries. The stock-market crash of 2000 was not caused by losses in the typewriter, film, telegraph, and slide-rule industries. It was the slightly-ahead-of-their-time tech companies that went bust. Similarly, the stock-market crash of 1929 was not caused by plummeting demand for horse-drawn carriages. It was the new radio, movie, automobile, and electric appliance industries that collapsed.

If one is worried about the financial risks associated with the energy transition, new astronomically-valued darlings such as Tesla are the danger. The biggest financial danger is a green bubble, fueled as previous booms by government subsidies and central-bank encouragement. Today’s high-fliers are vulnerable to changing political whims and new and better technologies. If regulatory credits dry up or if hydrogen fuel cells displace batteries, Tesla is in trouble. Yet our regulators wish only to encourage investors to pile on.

Climate financial regulation is an answer in search of a question. The point is to impose a specific set of policies that cannot pass via regular democratic lawmaking or regular environmental rulemaking, which requires at least a pretense of cost-benefit analysis.

These policies include defunding fossil fuels before replacements are in place, and subsidizing battery-powered electric cars, trains, windmills, and photovoltaics – but not nuclear, carbon capture, hydrogen, natural gas, geoengineering, or other promising technologies. But, because financial regulators are not allowed to decide where investment should go and what should be starved of funds, “climate risk to the financial system” is dreamed up and repeated until people believe it, in order to shoehorn these climate policies into financial regulators’ limited legal mandates.

Climate change and financial stability are pressing problems. They require coherent, intelligent, scientifically valid policy responses, and promptly. But climate financial regulation will not help the climate, will further politicize central banks, and will destroy their precious independence, while forcing financial companies to devise absurdly fictitious climate-risk assessments will ruin financial regulation. The next crisis will come from some other source. And our climate-obsessed regulators will once again fail utterly to anticipate it – just as a decade’s worth of stress testers never considered the possibility of a pandemic.

John H. Cochrane is a senior fellow at the Hoover Institution.

David Burton writes to the Securities Exchange Commission explaining the hazards they will be taking on needlessly should they continue desiring to impose Climate Change Disclosures on publicly traded enterprises.  His document was sent to the SEC Chairman entitled Re: Comments on Climate Disclosure.  Excerpts in italics with my bolds.

Summary of Key Points

1. Climate Change Disclosure Would Impede the Commission’s Important Mission.

The important mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Mandatory climate change disclosure would impede rather than further that mission. It would affirmatively harm investors, impede capital formation and do nothing to improve the efficiency of capital markets.

2. Immaterial Climate Change “Disclosure” Would Obfuscate Rather than Inform.

The concept of materiality has been described as the cornerstone of the disclosure system established by the federal securities laws. Disclosure of material climate-related information is already required under ordinary securities law principles and Regulation SK. Mandatory “disclosure” of immaterial, highly uncertain, highly disputable information would obfuscate rather than inform. It will harm rather than hurt investors.

3. Climate Models and Climate Science are Highly Uncertain.

There is a massive amount of variance among various climate models and uncertainty regarding the future of the climate.

4. Economic Modeling of Climate Change Effects is Even More Uncertain.

There is an even higher degree of variance and uncertainty associated with attempts to model or project the economic impact of highly divergent and uncertain climate models. Any estimate of the economic impact of climate change would have to rely on highly uncertain and divergent climate model results discussed below. In addition to this high degree of uncertainty would be added an entirely new family of economic ambiguity and uncertainty. Any economic estimate of the impact of climate change would also have to choose a discount rate to arrive at the present discounted value of future costs and benefits of climate change and to estimate the future costs and benefits of various regulatory or private responses. The choice of discount rate is controversial and important. Estimates would need to be made of the cost of various aspects of climate change (sea level rises, the impact on agriculture, etc.). Estimates would need to be made of the cost of various remediation techniques. Guesses would need to be made about the rate of technological change. Guesses would need to be made about the regulatory, tax and other responses of a myriad of governments. Estimates would need to be made using conventional economic techniques regarding the economic impact of those changes which, in turn, would reflect a wide variety of techniques and in many cases a thin or non-existent empirical literature. Guesses would need to be made of market responses to all of these changes since market participants will not stand idly by and do nothing as markets and the regulatory environment change. Then, after making decisions regarding all of these extraordinarily complex, ambiguous and uncertain issues, issuers would then need to assess the likely impact of climate change on their specific business years into the future – a business that may by then bear little resemblance to the issuers’ existing business.

Then, the Commission would need to assess the veracity of the issuers’ “disclosure” based on this speculative house of cards. The idea that all of this can be done in a way that will meaningfully improve investors’ decision making is not credible.

5. The Commission Does Not Possess the Expertise to Competently Assess Climate Models or the Economic Impact of Climate Change.

The Commission has neither the expertise to assess climate models nor the expertise to assess economic models purporting to project the economic impact of divergent and uncertain climate projections.

6. The Commission Has Neither the Expertise nor the Administrative Ability to Assess the Veracity of Issuer Climate Change Disclosures.

The Commission does not have the expertise or administrative ability to assess the veracity, or lack thereof, of issuer “disclosures”  based on firm-specific speculation regarding the impact of climate change which would be based on firm-specific choices regarding highly divergent and uncertain economic models projecting the economic impact of climate changes based on firm-specific choices regarding highly divergent and uncertain climate models.

7. Commission Resources Are Better Spent Furthering Its Mission.

Imposing these requirements and developing the expertise to police such climate disclosure by thousands of issuers will involve the expenditure of very substantial resources. These resources would be much better spent furthering the Commission’s important mission.

8. The Costs Imposed on Issuers Would be Large.

Requiring all public companies to develop climate modeling expertise, the ability to make macroeconomic projections based on these models and then make firm-specific economic assessments based on these climate and economic models will be expensive, imposing costs that will amount to billions of dollars on issuers. These expenses would harm investors by reducing shareholder returns.

9.Climate Change Disclosure Requirements Would Further Reduce the Attractiveness of Becoming a Public Company,
Harming Ordinary Investors and Entrepreneurial Capital Formation.

Such requirements would further reduce the attractiveness of being a registered, public company. They would exacerbate the decline in the number of public companies and the trend of companies going public later in their life cycle. This, in turn, would deny to ordinary (unaccredited) investors the opportunity to invest in dynamic, high-growth, profitable companies until most of the money has already been made by affluent accredited investors. It would further impede entrepreneurial access to public capital markets.

10. Climate Change Disclosure Requirements Would Create a New Compliance Eco-System and a New Lobby to Retain the Requirements.

The imposition of such requirements would result in the creation of a new compliance eco-system and pro-complexity lobby composed of the economists, accountants, attorneys and compliance officers that live off of the revised Regulation S-K.

11. Climate Change Disclosure Requirements Would Result in Much Litigation.

The imposition of such requirements would result in much higher litigation risk and expense as private lawsuits are filed challenging the veracity of climate disclosures. These lawsuits are virtually assured since virtually no climate models have accurately predicated future climate and the economic and financial projections based on these climate models are even more uncertain. Litigation outcomes would be as uncertain as the underlying climate science, economics and the associated financial projections. This would harm investors and entrepreneurial capital formation.

12. Material Actions by Management in Furtherance of Social and Political Objectives that Reduce Returns must be Disclosed.

Many environmentally constructive corporate actions will occur in the absence of any government mandate or required disclosure. For example, energy conservation measures may reduce costs as well as emissions. No new laws or regulations are necessary to induce firms to take these actions. Assuming they are not utterly pointless, climate change disclosure laws presumably would be designed to induce management to take action that they would not otherwise take. To the extent management takes material actions in furtherance of social and political objectives (including ESG objectives) that reduce shareholder returns, whether induced by climate change disclosure requirements or taken for other reasons, they need to disclose that information. The Commission should ensure that they do so. Absent some drastic change in the underlying law by Congress, this principle would apply to any reduction in returns whether induced by ESG disclosures (climate change related or otherwise) or taken by management on its own initiative to achieve social and political objectives.

13. Fund Managers Attempts to Profit from SRI at the Expense of Investors Should be Policed.

Fund management firms are generally compensated from either sales commissions (often called loads) or investment management fees that are typically based on assets under management. Their compensation is not closely tied to performance. Thus, these firms will often see a financial advantage in selling “socially responsible” products that perform no better and often worse than conventional investments. It is doubtful that this is consistent with Regulation BI. Their newfound interest in socially responsible investing should be taken with the proverbial grain of salt. The Commission should monitor their efforts to profit from SRI at the expense of investors.

14. Duties of Fund Managers Should be Clarified.

The extreme concentration in the proxy advisory and fund management business is cause for concern. As few as 20 firms may exercise effective control over most public companies. The Commission should make it clear that investment advisers managing investment funds, including retirement funds or accounts, have a duty to manage those funds and to vote the shares held by the funds in the financial, economic or pecuniary interest of the millions of small investors that invest in, or are beneficiaries of, those funds and that the funds may not be managed to further the managers’ preferred political or social objectives.

15. Securities Laws are a Poor Mechanism to Address Externalities.

Externalities, such as pollution, should be addressed by either enhancing property rights or, in the case of unowned resources such as the air and waterways, by a regulatory response that carefully assesses the costs and benefits of the regulatory response. Securities disclosure is the wrong place to try to address externalities. Policing externalities is far outside of the scope of Commission’s mission and the purpose of the securities laws.

16. Climate Change Disclosure Requirements Would Have No Meaningful Impact on the Climate.

When all is said and done, climate change disclosure requirements will have somewhere between a trivial impact and no impact on climate change.

17. Efforts to Redefine Materiality or the Broader Purpose of Business should be Opposed.

Simply because some politically motivated investors seek to impose a disclosure requirement on issuers does not make such a requirement material. The effort to redefine materiality in the securities laws is part of an increasingly strident effort to redefine the purpose of businesses more generally to achieve various social or political objectives unrelated to earning a return, satisfying customers, or treating workers or suppliers fairly. This is being done under the banner of social justice; corporate social responsibility (CSR); stakeholder theory; environmental, social and governance (ESG) criteria; socially responsible investing (SRI); sustainability; diversity; business ethics; common-good capitalism; or corporate actual responsibility. The social costs of ESG and broader efforts to repurpose business firms will be considerable. Wages will decline or grow more slowly, firms will be less productive and less internationally competitive, investor returns will decline, innovation will slow, goods and services quality will decline and their prices will increase.

18.  ESG Requirements will Make Management Even Less Accountable.

In large, modern corporations there is a separation of ownership and control. There is a major agent/principal problem because management and the board of directors often, to varying degrees, pursue their own interest rather than the interests of shareholders. Profitability is, however, a fairly clear measure of the success or failure of management and the board. If a firm become unprofitable or lags considerably in profitability, the board may well replace management, shareholders may replace the board or another firm may attempt a takeover. Systematic implementation of regulatory ESG or CSR requirements will make management dramatically less accountable since such requirements will come at the expense of profitability and the metrics relating to success or failure of achieving ESG or CSR requirements will be largely unquantifiable. For that matter, ESG or CSR requirements themselves tend to be amorphous and ever changing.