[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]






 
                        ADDRESSING CLIMATE AS A

                       SYSTEMIC RISK: THE NEED TO

                      BUILD RESILIENCE WITHIN OUR

                      BANKING AND FINANCIAL SYSTEM

=======================================================================

                             HYBRID HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CONSUMER PROTECTION
                       AND FINANCIAL INSTITUTIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 30, 2021

                               __________

       Printed for the use of the Committee on Financial Services
       
       

                           Serial No. 117-36
                           
                           
                           
  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                         
  
  
  
  
                           ______                       


             U.S. GOVERNMENT PUBLISHING OFFICE 
 45-383 PDF           WASHINGTON : 2021   
                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York           PETE SESSIONS, Texas
DAVID SCOTT, Georgia                 BILL POSEY, Florida
AL GREEN, Texas                      BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri            BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado              ANN WAGNER, Missouri
JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio                   FRENCH HILL, Arkansas
JUAN VARGAS, California              TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa                     TED BUDD, North Carolina
SEAN CASTEN, Illinois                DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts       TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York             ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts      JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina           BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan              LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania         WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York   VAN TAYLOR, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
     Subcommittee on Consumer Protection and Financial Institutions

                   ED PERLMUTTER, Colorado, Chairman

GREGORY W. MEEKS, New York           BLAINE LUETKEMEYER, Missouri, 
DAVID SCOTT, Georgia                     Ranking Member
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California             BILL POSEY, Florida
AL GREEN, Texas                      ANDY BARR, Kentucky
BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
JUAN VARGAS, California              BARRY LOUDERMILK, Georgia
AL LAWSON, Florida                   TED BUDD, North Carolina
MICHAEL SAN NICOLAS, Guam            DAVID KUSTOFF, Tennessee, Vice 
SEAN CASTEN, Illinois                    Ranking Member
AYANNA PRESSLEY, Massachusetts       JOHN ROSE, Tennessee
RITCHIE TORRES, New York             WILLIAM TIMMONS, South Carolina


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 30, 2021................................................     1
Appendix:
    June 30, 2021................................................    31

                               WITNESSES
                        Wednesday, June 30, 2021

Allen, Hilary J., Associate Professor of Law, American University 
  Washington College of Law......................................     6
Cleetus, Rachel, Policy Director, Union of Concerned Scientists..     7
Rodriguez Valladares, Mayra, Managing Principal, MRV Associates..     9
Rossi, Clifford V., Executive-in-Residence and Professor-of-the-
  Practice, Robert H. Smith School of Business, University of 
  Maryland.......................................................    13
Rothstein, Steven, Managing Director, Ceres Accelerator for 
  Sustainable Capital Markets....................................    11

                                APPENDIX

Prepared statements:
    Allen, Hilary J..............................................    32
    Cleetus, Rachel..............................................    52
    Rodriguez Valladares, Mayra..................................    66
    Rossi, Clifford V............................................    95
    Rothstein, Steven............................................   104

              Additional Material Submitted for the Record

Perlmutter, Hon. Ed:
    CoreLogic 2020 Climate Change Catastrophe Report.............   139


                        ADDRESSING CLIMATE AS A

                       SYSTEMIC RISK: THE NEED TO

                      BUILD RESILIENCE WITHIN OUR

                      BANKING AND FINANCIAL SYSTEM

                              ----------                              


                        Wednesday, June 30, 2021

             U.S. House of Representatives,
                Subcommittee on Consumer Protection
                        and Financial Institutions,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:01 p.m., in 
room 2128, Rayburn House Office Building, Hon. Ed Perlmutter 
[chairman of the subcommittee] presiding.
    Members present: Representatives Perlmutter, Foster, 
Vargas, Lawson, Casten; Luetkemeyer, Lucas, Posey, Barr, 
Loudermilk, Kustoff, and Timmons.
    Ex officio present: Representatives Waters and McHenry.
    Chairman Perlmutter. The Subcommittee on Consumer 
Protection and Financial Institutions will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of this subcommittee are authorized to 
participate in today's hearing.
    With the hybrid format of this hearing, we have some 
Members and witnesses participating in person, and others on 
the Webex platform.
    I would like to remind all Members participating remotely 
to keep themselves muted when they are not being recognized by 
the Chair. The staff has been instructed not to mute Members 
except when a Member is not being recognized by the Chair, and 
there is inadvertent background noise.
    Members are also reminded that they may only participate in 
one remote proceeding at a time. If you are participating 
remotely today, please keep your camera on, and if you choose 
to attend a different remote proceeding, please turn your 
camera off.
    Today's hearing is entitled, ``Addressing Climate as a 
Systemic Risk: The Need to Build Resilience Within Our Banking 
and Financial System.''
    I now recognize myself for 4 minutes to give an opening 
statement.
    In 2008, the housing bubble collapse and financial crisis 
caught many experts, investors, and policymakers off guard, and 
the resulting Great Recession devastated communities across the 
country.
    When threats to financial stability are not properly valued 
and mitigated, the consequences can be severe and longstanding: 
2020 tied 2016 as the hottest year on record, and the 7 hottest 
years recorded have all occurred since 2014. In 2020 alone, 
more than 58,000 wildfires burned 10.1 million acres and caused 
$20 billion in damages.
    In my home State of Colorado, in addition to more severe 
and frequent wildfires, we are seeing less annual snowpack, 
more water scarcity and droughts, and more heat waves. These 
changes pose long-term risks for Colorado's agriculture, 
tourism, and housing industries.
    Whether it is rising sea levels threatening coastal 
communities, more severe hurricanes on the East and Gulf 
Coasts, wildfires in the West, or regional climate changes 
affecting crop yields on the plains, climate change is 
affecting every State and community in our nation.
    These risks are intertwined with the financial system. 
Insurers can expect more claims related to extreme weather 
events, lenders will see more risks in underwriting carbon-
dependent industries, and economic changes will affect asset 
values across many sectors. Climate change is creating 
significant and complex risks in our financial system that we 
cannot ignore.
    Last month, President Biden signed an Executive Order 
directing the National Economic Council, the Treasury 
Department, and the Office of Management and Budget to develop 
a government-wide strategy for evaluating and addressing 
climate-related financial risk and assessing the necessary 
financing to achieve net-zero emissions by 2050.
    Several of the financial regulators have already begun work 
to understand climate risk. We can either work together in 
Congress and across the government to coordinate sensible 
policies to evaluate and mitigate financial risk related to 
climate, and help our economy transition to a carbon-neutral 
future, or we can wait until the market and the consequences of 
climate change dictate such actions for us.
    Last week, I reintroduced the Green Neighborhoods Act, a 
bill aimed at making the housing sector more energy-efficient, 
and ensuring that workers can get trained for green jobs. This 
is one example of how Congress can help facilitate an orderly 
transition of our economy and make the housing sector greener.
    The canary in the coal mine has stopped singing. We must 
act now to ensure our financial system is resilient in the face 
of climate change and the economic transition.
    Today's hearing will examine physical and transition risks 
posed by climate change and how financial regulators can work 
to evaluate and mitigate these risks. I look forward to our 
discussion today, so we can ensure that our financial system is 
ready for what is coming.
    With that, I now recognize the ranking member of the 
subcommittee, Mr. Luetkemeyer from Missouri, for 4 minutes for 
an opening statement.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Climate risk has certainly been a buzzword, both within the 
banking industry and within the Biden Administration. The 
Administration has issued multiple Executive Orders focused on 
climate risk, specifically an Executive Order titled, 
``Climate-Related Financial Risk,'' which requires the 
Financial Stability Oversight Council (FSOC) to assess climate-
related financial risk to the stability of the Federal 
Government and the stability of the financial system.
    Within the Administration, the Federal Reserve has been the 
most active regulator in this space. In May, they announced the 
establishment of the Financial Stability Climate Committee to 
identify, assess, and address climate-related risk. 
Furthermore, the Federal Reserve has requested information from 
lenders on how they handle climate risk at their institutions.
    Let me be clear: Federal regulators should understand how 
financial institutions are handling risk mitigation in their 
lending portfolio. This includes numerous types of risk, 
including credit risk, concentration risk, and default risk.
    However, the inclusion of climate-related financial risk 
must be better understood by both regulators and financial 
institutions before any framework around this risk can be 
initiated.
    It is clear that certain financial institutions, 
particularly the largest U.S. firms, are including climate risk 
in their risk-assessment processes. The U.S. global 
systemically important banks (G-SIBs) have all limited their 
approach to carbon financing in one way or another. Some have 
pledged to provide investments in sustainable businesses and 
technologies, and others have pledged to reach net-zero 
greenhouse gas emissions in their financial activities by a 
certain year.
    As the economy and consumer demands change, it is 
appropriate for financial institutions to change as well. 
Ensuring your lending and investment portfolio is diversified 
and risk-averse is a core tenet of risk management.
    However, as financial institutions move in the direction of 
sustainable investment, it is appropriate to determine if the 
U.S. economy, in particular the energy industry, is ready to 
move away from fossil fuels and carbon-intensive energy.
    Will the energy sector be choked off from financial 
services that they need to exist? What are the costs of the 
transition risks to the U.S. economy?
    These are questions that must be seriously considered and 
understood before an industry-wide stance is taken regarding 
investments in carbon-intensive industries.
    While Federal regulators should understand these risks, I 
must associate myself with the comments of Federal Reserve Vice 
Chairman of Supervision Randal Quarles, who said, ``Broad 
climate policy is the role of Congress and other Federal 
agencies, not the Federal Reserve.''
    Congress should not deputize the financial services 
industry to be the climate police, greenlighting sustainable 
projects and shutting down legally-operating businesses that 
are carbon-intensive, especially when they have no 
understanding of how climate risks will impact the economy and 
do not have sufficient data and modeling to determine these 
impacts.
    The Comprehensive Capital Analysis and Review (CCAR) stress 
testing amongst financial institutions looks 9 quarters into 
the future. Most climate change models look about 30 to 100 
years into the future. If we go down the path of forcing 
institutions to speculate on future risk, and tying their 
capital requirements to this risk before we have an appropriate 
understanding of the economic impacts and the effect on access 
to credit and the ability of the energy sector to pivot to new 
technologies, we could do irreparable harm to our economy.
    And yet, that is exactly what my colleagues on the other 
side of the aisle are proposing. They have noticed legislation 
in this hearing that would directly tie climate-related risks 
to bank capital by increasing the risk weighting of assets 
financing greenhouse gas (GHG) emissions.
    This is an extremely irresponsible proposal. Again, we have 
no understanding of how this would impact the economy, no real 
data on how this would impact the world's climate, no clear 
information on how we can accurately predict climate-related 
financial risk, and no clear understanding of how transition 
risks could impact the safety and soundness of financial 
institutions and the U.S. economy at large.
    I look forward to bringing up these concerns with the 
panelists today.
    And with that, Mr. Chairman, I yield back.
    Chairman Perlmutter. The gentleman yields back.
    The Chair of the full Financial Services Committee, the 
gentlewoman from California, Chairwoman Waters, is now 
recognized for 1 minute.
    Chairwoman Waters. Thank you, Chairman Perlmutter.
    Over the past year, we have witnessed examples of how 
climate change can disrupt our financial system. The financial 
toll, including insurance losses from the most devastating 
wildfire seasons on record, grew so sharply that our Governor 
in California had to issue a moratorium to prevent insurers 
from denying insurance coverage to homeowners.
    Meanwhile, the hundreds of bankruptcies in the oil and gas 
sector as a result of the economic fallout from COVID-19 have 
provided a preview of the type of pain our economy will likely 
face as climate change becomes worse.
    I am pleased that President Biden, Treasury Secretary 
Yellen, and policymakers at the Fed and elsewhere have listened 
to those of us who have raised concerns about the urgent 
financial stability risk of climate change and that they are 
beginning to take action.
    So, I am looking forward to the hearing today. And I assure 
you, Chairman Perlmutter, that we are going to be hearing from 
Seattle and Portland. Portland was 116 degrees as of yesterday, 
and Seattle was 104 as of Sunday. And I don't know what 
financial disruption this is going to cause, but climate change 
is real.
    I yield back the balance of my time.
    Chairman Perlmutter. The gentlelady yields back.
    The ranking member of the Full Committee, the gentleman 
from North Carolina, Ranking Member McHenry, is recognized for 
1 minute.
    Mr. McHenry. Thank you, Chairman Perlmutter.
    You have heard me say this before, and I have said it 
repeatedly: Climate change is real. But instead of taking the 
time to get this legislation right, my Democrat colleagues are 
once again rushing to legislate to appease the progressive 
left.
    Usurious policies will have far-reaching and unintended 
harmful consequences. Just as with the so-called Climate Crisis 
Financial Stability Act, without doing any work, without 
listening to any experts, without any data, the Democrats want 
to take the step of determining risks for financial 
institutions and punishing certain institutions with a capital 
surcharge.
    Now, not only is this unrealistic, I think it is a 
dangerous step. We need to make sure that any next step 
strengthens the resiliency of the system and seriously 
addresses climate risk, not appeases some progressive 
stakeholder group.
    I yield back.
    Chairman Perlmutter. The gentleman yields back.
    And I would just like to alert the Members and the 
panelists that we are expecting votes probably around 3:00, and 
what I would like to do is get through the statements of all of 
the witnesses as much as we can before we have to take a break 
for those votes. And if we can get some questioning in before 
the votes are called, we will do that. Otherwise, we will 
recess until we finish the votes on the Floor, and then we will 
reconvene once the votes are finished.
    With that, we will turn to our witnesses.
    Professor Hilary Allen is an associate professor of law at 
American University. Professor Allen's research is focused on 
domestic and international financial stability regulation, and 
she teaches classes in banking law, securities regulation, 
financial regulation, and other topics.
    Dr. Rachel Cleetus is a policy director with the Union of 
Concerned Scientists. Dr. Cleetus is an economist with 20 years 
of experience working on climate and clean energy policies and 
is an expert on the United Nations Framework Convention on 
Climate Change process.
    Ms. Mayra Rodriguez Valladares is the managing principal 
with MRV Associates. Ms. Rodriguez Valladares is an independent 
consultant who has advised central banks, insurers, regulators, 
and financial services firms on risk and compliance issues.
    Mr. Steven Rothstein is the managing director of Ceres 
Accelerator for Sustainable Capital Markets. Mr. Rothstein's 
work at Ceres Accelerator is focused on transforming practices 
governing capital markets to reduce the financial impacts of 
the climate crisis.
    And Dr. Clifford Rossi is the executive-in-residence and 
professor of the practice at the Robert H. Smith School of 
Business, University of Maryland. Dr. Rossi has almost 25 years 
of experience in government and financial services and has held 
senior roles in risk management at several of the largest 
financial services companies.
    Our witnesses are reminded that their oral testimony will 
be limited to 5 minutes. You should be able to see a timer on 
your screen or on your desk in front of you that will indicate 
how much time you have left. When you have 1 minute remaining, 
a yellow light will appear. I would ask that you be mindful of 
the timer, and when the light appears, wrap up your testimony 
so that we can be respectful of both the other witnesses' and 
the subcommittee members' time.
    And without objection, your written statements will be made 
a part of the record.
    Professor Allen, you are now recognized for 5 minutes to 
give an oral presentation of your testimony.

   STATEMENT OF HILARY J. ALLEN, ASSOCIATE PROFESSOR OF LAW, 
         AMERICAN UNIVERSITY WASHINGTON COLLEGE OF LAW

    Ms. Allen. Thank you, Chairman Perlmutter. Thank you, also, 
Chairwoman Waters, Ranking Member McHenry, and Ranking Member 
Luetkemeyer. And thank you, members of the subcommittee.
    I very much appreciate the opportunity to testify at 
today's hearing. As Chairman Perlmutter already mentioned, my 
name is Hilary Allen, and I am an associate professor at the 
American University Washington College of Law. I teach classes 
in corporate law and financial regulation, and my research 
focuses on financial stability regulation.
    Prior to entering academia, I spent 7 years working in the 
financial services groups of prominent law firms in London, 
Sydney, and New York, and in 2010, I worked with the Financial 
Crisis Inquiry Commission, which was appointed by Congress to 
study the causes of the financial crisis of 2008.
    The views I am expressing today are entirely my own. They 
do not represent American University or any other institution.
    In my testimony today, I would like to highlight three 
points for the committee.
    First, I will underline the stakes involved in preparing 
the financial system for the physical and transitional risks 
associated with climate change. The impacts of a financial 
crisis can be irreversible and catastrophic, particularly for 
the most vulnerable members of society, so financial regulators 
should take steps to make the financial system more robust to 
the climate-related uncertainty that we face.
    Second, I would like to advocate for increased focus on the 
potential systemic effects of operational problems arising from 
extreme weather events and other environmental changes, because 
financial stability regulation often neglects these operational 
risks.
    Finally, I will speak about reforming the Office of 
Financial Research, known as the OFR.
    All of the Federal financial regulatory agencies need to be 
involved in making this financial system more robust to 
climate-related threats, but the OFR can play a unique and 
crucial part in that effort if it is rebuilt as an 
interdisciplinary hub of the different kinds of expertise 
needed to assess and respond to these threats.
    It has never been good policy to just let financial crises 
happen and then clean up afterwards. Even with the Herculean 
and imaginative crisis response efforts that we saw from the 
Federal Reserve and other governmental bodies in the wake of 
the financial crisis of 2008, the economic fallout of that 
crisis could not be fully contained. Many of the most 
vulnerable members of our society still have not recovered from 
it.
    I therefore urge the committee to take a precautionary 
approach to financial stability regulation in general and, in 
particular, towards climate-related risks.
    A precautionary approach requires us to be creative in our 
thinking about risks to financial stability and favors bold, 
simple responses where possible.
    I have outlined a number of responses in my written 
statement that are designed to help manage the uncertainty 
about the precise physical and transitional risks we face, 
including regulatory capital requirements that require banks to 
fund themselves with more common equity to act as a buffer 
against uncertainty and help prevent financial institution 
failures and asset fire sales.
    One reform that I want to stress for the committee today is 
the need for what I call macro-operational regulation, which 
takes seriously the possible systemic consequences of the steps 
taken by individual financial institutions to manage their own 
operational risks.
    For example, a financial institution that finds part of its 
physical infrastructure damaged could shift its operations to 
alternative infrastructure. That would be a rational step by 
the institution, designed to enable it to keep providing 
financial services. But if that alternative infrastructure is 
overloaded as a result, that may create problems for other 
financial institutions that also rely on the alternative 
infrastructure.
    Different kinds of experts are needed to help think 
creatively about the types of threats that climate change poses 
for the financial system. In the case of the operational risk 
spillovers that I just mentioned, complex science expertise 
would be very helpful.
    Climate scientists and environmental economists will 
obviously be crucial to the effort. Data scientists and 
software engineers would also make important contributions.
    The Office of Financial Research should be the new home for 
these types of interdisciplinary personnel, because 
consolidating interdisciplinary expertise in one agency can 
create virtuous cycles that make hiring easier and promote 
collaboration and consistency in responding to new threats.
    In my written testimony, I set out proposals for rebuilding 
the OFR as an interdisciplinary expertise hub. Many of these 
proposals relate to staffing and to the OFR's relationship with 
other financial regulatory bodies, particularly the Financial 
Stability Oversight Council (FSOC).
    I urge the committee to pursue these proposals as a matter 
of urgency in order to ensure that our financial regulatory 
architecture is equipped to deal with the challenges of climate 
change.
    Thank you.
    [The prepared statement of Professor Allen can be found on 
page 32 of the appendix.]
    Chairman Perlmutter. Thank you for your testimony.
    Now, I would like to recognize Dr. Rachel Cleetus for 5 
minutes for her testimony.

    STATEMENT OF RACHEL CLEETUS, POLICY DIRECTOR, UNION OF 
                      CONCERNED SCIENTISTS

    Ms. Cleetus. Thank you very much, Chairman Perlmutter, 
Ranking Member Luetkemeyer, and members of the subcommittee, 
for providing me the opportunity to testify remotely here today 
on the systemic risks of climate change. My name is Rachel 
Cleetus, and I am the policy director for the climate and 
energy program at the Union of Concerned Scientists.
    Summer has barely begun and we are already in the midst of 
a stunning drought in much of the Western United States. 
Record-setting heatwaves are underway, including an 
unprecedented one in the Pacific Northwest. The Midwest has 
been hit by heavy rain and flash flooding. The wildfire season 
is underway, another intense one. We are projected to have an 
above-normal hurricane season.
    Meanwhile, the COVID-19 pandemic and the economic crisis 
continue to be a threat.
    What we are experiencing this summer is part of a very 
sobering trend. In addition to steadily rising temperatures, 
climate change is also driving accelerating sea level rise and 
ocean acidification. Many sectors of the economy are at risk.
    Our infrastructure, agriculture, fisheries, insurance, real 
estate, tourism, and the impact on the health and safety of 
people, including outdoor workers, is very significant, too.
    Our nation experienced $22 billion-plus extreme weather and 
climate-related disasters last year. Climate-related 
infrastructure disruptions are increasing. Our roads, bridges, 
rail lines, and air travel are all at risk.
    The electricity system which underpins our daily lives has 
repeatedly failed. Heat waves put enormous pressure on the 
power grid right at a time when we need power for cooling. We 
get power outages, as we are seeing in the Northwest right now, 
which can trigger cascading effects, including business 
interruptions and loss of critical services that depend on 
electricity.
    Meanwhile, heat-trapping emissions that fuel climate change 
are still rising. The science is clear: We need to cut 
emissions by half in 2030 and get to net zero no later than 
2050.
    And yet, today our economic and financial systems are not 
accounting for these risks, nor are they helping drive a rapid 
shift to a net-zero economy.
    A combination of shortsightedness, inadequate policies, the 
outsized power of fossil fuel companies, and business-as-usual 
inertia is getting in the way.
    And if we fail to take action now, the potential for severe 
shocks to our financial system will grow. And as with previous 
crises, the impacts will be especially harsh for those who can 
least afford it--low-income households, communities of color.
    Instead, we have an opportunity now to ensure that our 
economy and financial system are put on a path to be fairer, 
more climate-resilient, and compatible with a low-carbon 
future.
    We need a coordinated, comprehensive approach from the 
national to the international, the local level, with Congress, 
financial regulators, and the Federal Government all playing 
their part.
    We need mandatory risk disclosure in the marketplace to 
help correct market failures. Fossil fuel companies and their 
investors who bear an outsized responsibility for climate 
change must face market pressures to change their business 
model and lending practices. We need transparent, uniform 
disclosure of market risks from climate change based on the 
best available science.
    Congress must pass legislation to set up an advisory 
committee on climate risk in the FSOC, require climate risk 
disclosure in the marketplace, and take steps to prioritize the 
well-being of marginalized communities.
    Much more is at stake than the fiscal well-being of U.S. 
businesses. The public relies on these companies to grow and 
manage our savings, investments, pension funds, and energy 
choices. Our market rules and financial safeguards must help 
develop the outcomes we need to protect our health, welfare, 
and prosperity, not simply the profits for the powerful and 
elite few.
    We need a transformative climate strategy that addresses 
underlying systemic challenges, like structural racism and 
social-economic inequities. We have urgent choices before us.
    But because it is our actions that are the source of heat-
trapping emissions, here in one of the most powerful economies 
in the world, we can also help set the rules of the market. We 
cannot have a healthy economy if the planet is on fire and vast 
areas are under water.
    Thank you for this opportunity to testify today, and for 
your efforts to protect our financial system from climate risk 
and to ensure that it helps contribute to the climate solutions 
we so urgently need.
    [The prepared statement of Dr. Cleetus can be found on page 
52 of the appendix.]
    Chairman Perlmutter. Thank you, Dr. Cleetus, for your 
testimony.
    Ms. Rodriguez Valladares, you are now recognized for 5 
minutes to give an oral presentation of your testimony.

 STATEMENT OF MAYRA RODRIGUEZ VALLADARES, MANAGING PRINCIPAL, 
                         MRV ASSOCIATES

    Ms. Rodriguez Valladares. Chairman Perlmutter, Ranking 
Member Luetkemeyer, and distinguished members of the 
subcommittee, thank you for the opportunity to appear before 
you.
    I am Mayra Rodriguez Valladares, managing partner of MRV 
Associates. For over 3 decades, I have worked with bankers and 
financial regulators in over 30 countries on a wide range of 
risks that can threaten financial institutions' safety and 
soundness.
    Unlike the global financial crisis, scientists have been 
warning us for decades about the danger of climate change. 
Through the numerous financial crises I have endured, I have 
learned that when someone tells me this time it is going to be 
different, it is a warning signal that urgent action is 
critical now to avoid another painful crisis.
    U.S. global systemically important banks are very exposed 
to climate risks. Not only do they provide financial services 
in States vulnerable to intensifying climate events, they have 
operations in foreign countries such as the UK, Japan, Canada, 
and Mexico, which are exposed to physical and transition risks.
    Regional, community, and agricultural banks are also 
exposed to climate change. In 2019, severe flooding in the 
Midwest brought loan defaults and payment challenges to their 
highest levels in 20 years.
    Banks in areas that serve people of color are also 
vulnerable to climate change since many of them are also in 
areas with a myriad of environmental, infrastructure, and 
housing challenges.
    I must note that the very significant rise in corporate 
leverage in the United States in the last 2 decades means that 
those companies are the most likely to default in the event 
that they are affected by climate change.
    Market investors have not priced in climate change risks 
because financial institutions and corporations are not 
required to identify, measure, control, and monitor their 
climate-related risks and to disclose them to the public.
    Opacity in the financial system is dangerous to investors 
and ordinary Americans.
    Given its membership of leading international standard-
setting bodies, such as the Financial Stability Board and the 
Basel Committee on Banking Supervision, U.S. regulators already 
work on climate change risk frameworks.
    In the U.S., the Financial Stability Oversight Council and 
its Office of Financial Research should be given the necessary 
human, data, and technological resources so they can analyze 
how climate change is impacting the entire financial system and 
to detect sources of systemic risk.
    Inaction is costly.
    FSOC and OFR should focus on non-banks that are exposed to 
climate-related risks. They are interconnected to banks, do not 
have strong management requirements, and are very opaque.
    Under Basel III, Pillar 1, bank regulators can require 
banks to model operational risk, which includes natural 
disasters that can hurt a bank's assets, both in the banking 
and trading portfolios.
    Under Pillar 2, banks can incorporate different risks, 
including climate change-induced defaults or market volatility, 
into their Internal Capital Adequacy Assessment Processes to 
determine economic capital levels to sustain unexpected losses.
    I respectfully recommend that financial regulators, 
especially the Federal Reserve, the OCC, and the FDIC, 
recommend to them that they should: one, create climate change 
stress tests or add climate change scenarios to existing 
supervisory exercises, such as the Comprehensive Capital 
Analysis Review and Dodd-Frank Stress Test; two, design 
specific climate change supervisory guidance for banks; three, 
update supervisory bank examination manuals to include how 
climate change impacts banks; four, conduct a review of the 
human resources to determine if they have enough professionals 
with knowledge about climate science, risk data aggregation, 
and modeling; five, review if they have robust technological 
systems to analyze climate change data and its impact on banks' 
risks; and six, address their climate change data gaps.
    I also recommend that bank regulators require banks to: 
one, conduct a gap analysis to determine what resources they 
need to improve risk data aggregation, climate change risk 
modeling, and technology; two, incorporate physical and 
transition risks into their enterprise-wide risk management 
frameworks and long-term financial plans to measure their 
climate risk exposures; three, include in their bank recovery 
and resolution plans and their comprehensive liquidity 
assessment reviews how physical and transition risks impact 
banks' funding, cost of borrowing, liquidity, and risk 
mitigation ability; and, lastly, disclose to the public climate 
change model results, including tail risks, via Basel III's 
Pillar 3 disclosures.
    I look forward to your questions, and I would be pleased to 
serve as a resource to you in the future as you continue to 
explore how to reduce the adverse impact of climate change on 
the safety and soundness of the American financial system.
    Thank you.
    [The prepared statement of Ms. Rodriguez Valladares can be 
found on page 66 of the appendix.]
    Chairman Perlmutter. Thank you very much for your 
testimony.
    I now recognize Mr. Rothstein for 5 minutes for his oral 
testimony.

    STATEMENT OF STEVEN ROTHSTEIN, MANAGING DIRECTOR, CERES 
          ACCELERATOR FOR SUSTAINABLE CAPITAL MARKETS

    Mr. Rothstein. Thank you, Chairman Perlmutter, and 
distinguished Members of Congress. Thank you for the invitation 
to be here.
    My name is Steven Rothstein, and I am the managing director 
of the Ceres Accelerator for Sustainable Capital Markets. Ceres 
is a nonprofit organization working with investors and 
companies to build sustainable leadership within our firms and 
drive policy solutions throughout our economy. Our membership 
represents Fortune 500 companies and investors with over $30 
trillion of assets under management.
    Our testimony draws from Ceres reports that we have also 
submitted into the record, Mr. Chairman. I am not here to talk 
about the systemic risk our climate has to our planet and our 
people, although it is paramount to the lives of our children 
and grandchildren.
    I am here to highlight the underrecognized risk to the 
safety and soundness of our financial institutions due to 
climate risk and the risks of the business-as-usual approach 
that some of the financial institutions pose on a livable, 
climate-safe world.
    If a banker or a bank regulator suggested that they don't 
need to plan for another pandemic or cyber attack, there would 
be a chorus of opinions saying they are not meeting their 
fiduciary responsibility.
    Potential exposure to climate risk is bigger and more 
systemic. Yet, there are leaders today in banking, insurance, 
and among financial regulators that do not fully account for 
financial risk.
    Even as we are working to overcome the unprecedented 
pandemic and the pain and loss that it brought, we have 
simultaneously had record-breaking fires, hurricanes, and 
unparalleled climate-related risks. As our Secretary of State 
said recently, we are running out of records to break.
    In short, we know more about the climate risk, as the 
chairman said in his introductory remarks, than we knew about 
the mortgage finance risk in 2008. But, surprisingly, we are 
not acting with the urgency required.
    There are dozens of strong international examples from 
financial regulators around the world, and we appreciate the 
initial steps from the Department of the Treasury, the Federal 
Reserve, and the SEC. But that is all they are, initial steps. 
So, we recommend that regulators take five immediate steps.
    One, immediately affirm the systemic nature of climate risk 
and its impacts on the financial market. The affirmation can 
take the form of a statement of an agency Chair or a report 
from the agency.
    Two, activate action on prudential supervision, as some of 
my colleagues have said. U.S. regulators have an explicit 
responsibility to supervise the risks that financial 
institutions take on. Consistent with that mandate, financial 
regulators should integrate climate change into the prudential 
supervision of banks, insurance companies, and other regulated 
financial institutions.
    The Federal Reserve, in particular, should take immediate 
steps to assess the climate risk to financial markets and 
mandate scenario analysis by the banks and the other financial 
institutions it supervises.
    They should also outline plans for conducting pilot climate 
stress tests of its supervised institutions to measure the 
impact of climate-related shocks and consider enhancing capital 
and liquidity requirements.
    In addition, we recommend that the Federal Reserve, the 
FDIC, the OCC, and the National Credit Union Administration 
expand their examiner training programs and manuals to ensure 
that staff fully understand climate risks faced by the 
financial institutions they monitor.
    Three, support the SEC's work on mandatory climate 
disclosure. We congratulate the SEC for their initial steps and 
hope they will be issuing bold rules later this year.
    Four, address how climate risks further exacerbate systemic 
racism, particularly as reflected in financial institutions. 
Financial regulators should develop strategies to address 
systemic climate risks and structural racism in an integrated 
way. The Community Reinvestment Act is a ripe opportunity to do 
this.
    Five, build capacity for smart decision-making on climate 
change by coordinating action with other U.S. and global 
regulators and by hiring and training additional staff.
    Coordinated action by U.S. regulators at the global, 
Federal, and State levels is essential to accelerating this. 
The FSOC generally, and the Biden Executive Order that has been 
referred to, are critical steps. We appreciate the recent 
actions of U.S. financial regulators to coordinate with global 
peers as a start.
    To conclude, U.S. financial regulators have a critical role 
to play in ensuring the resilience of our economy, weakened by 
the global pandemic and systemic racism, and threatened by 
future climate shocks. The fundamental safety and soundness of 
our financial institutions is relying on them and on each of 
you.
    Thank you again for this opportunity.
    [The prepared statement of Mr. Rothstein can be found on 
page 104 of the appendix.]
    Chairman Perlmutter. Thank you for your testimony. You hit 
that right on 5 minutes, so I appreciate that.
    Dr. Rossi, you are now recognized for 5 minutes.

  STATEMENT OF CLIFFORD V. ROSSI, EXECUTIVE-IN-RESIDENCE AND 
PROFESSOR-OF-THE-PRACTICE, ROBERT H. SMITH SCHOOL OF BUSINESS, 
                     UNIVERSITY OF MARYLAND

    Mr. Rossi. Thank you, Chairman Perlmutter, Ranking Member 
Luetkemeyer, and members of the subcommittee. I am Dr. Clifford 
Rossi, professor of the practice and executive-in-residence at 
the Robert H. Smith School of Business at the University of 
Maryland.
    The views that I am expressing today are solely my own and 
do not represent those of the University of Maryland.
    I am here today to inform the subcommittee that imposing 
climate risk mandates on regulated depository institutions at 
this time would be detrimental to consumers, to the financial 
services sector, and to the economy at large.
    Let me be clear: Climate change is a real risk that 
requires a firm understanding of the current limitations of 
climate models, underlying data, how those data do and do not 
integrate with standard financial and risk models, and numerous 
other components in order to craft effective solutions to the 
underlying risk.
    I offer a unique perspective on this issue, having worked 
for about 23, 25 years, depending on sort of how you calculate 
those things, in the financial services industry, first as a 
regulator during the S&L crisis, and then at both Fannie Mae 
and Freddie Mac--pre-conservatorship--as well as at one of the 
largest commercial banks, the largest savings and loan, and the 
largest non-bank mortgage company during my tenure as a C-level 
risk executive, and now as a finance and risk professor working 
on climate risk issues and banking.
    Models in use today for climate scenario analysis are 
designed to represent the physics of a complex Earth system 
well into the future, and their output is limited for near-term 
use by financial institutions.
    As I have outlined in my written testimony, the models upon 
which urgent demands for a public policy response are based are 
subject to significant model risk. Model risk can be defined as 
the risk associated with errors in data, methods, or 
assumptions used to generate output from analytical models used 
for decision-making.
    Forcing financial institutions and their regulators toward 
expansive climate risk regulation based on effects that are not 
well-understood presents more risk to the financial system than 
a staged and methodical approach.
    Now, I applaud the intent of the Biden Administration, 
through their Executive Order, to assess climate-related 
financial risks and data. However, I would caution policymakers 
and regulators from imposing measures on regulated depositories 
based on the state of current climate analytics for the 
following reasons.
    First, the output from climate and associated integrated 
assessment models, or IAMs, are not close to being ready for 
use in bank financial and risk analytics such as bank stress 
test modeling, and suffer from the supposed, ``square peg in 
the round hole'' syndrome.
    The empirical linkages between long-term climate effects 
and short- to intermediate-term financial and risk factors are 
not sufficiently established currently to properly assess 
physical or transition risk impacts to the banking system from 
climate change.
    Second, both the climate and integrated assessment models 
upon which scenarios such as those proposed by the Network for 
Greening the Financial System (NGFS) are based are subject to 
considerable empirical error due to the underlying complexity 
of these models on interactions that are not fully understood 
in the scientific and financial research communities.
    Now, why is this important? Requiring banks to make hard 
money strategic decisions on lending, capital allocation, 
pricing, and other activities that have long-term consequences 
for consumers, the financial system, and economic growth based 
on models with a high degree of uncertainty is not at all 
consistent with prudent model risk management practices.
    Third, it is well-established in the psychology and 
economics literature that decision-making is affected by a 
number of cognitive biases. One of these is what I refer to as 
model or shiny object bias.
    Model bias occurs when decision-makers embrace the results 
from highly-sophisticated quantitative models based on 
perceptions that the apparent analytical rigor in those models 
necessarily translates into accurate and reliable outputs.
    There is widespread shiny object bias in the use of climate 
and integrated assessment models today among policymakers 
worldwide. This poses serious concerns regarding the use of 
these models for anything other than research applications at 
this time, as described earlier. Placing bets on financial 
markets on such models invites a host of long-term unintended 
consequences on the financial system.
    Climate change is a real risk that banks and other 
financial institutions should actively incorporate in with 
their existing risk management processes. However, such firms 
must take measured steps to understand these risks and not be 
forced into conducting analyses for which the models and 
outputs are not well-understood as they relate to financial 
services.
    Banks should instead focus attention on bolstering their 
risk awareness to climate change, starting with enhancing their 
risk governance process and controls, data, and analytics.
    Quantifying with a reasonable degree of confidence the 
impacts of physical and transition risk from climate change 
will require significant effort, time, and a true 
interdisciplinary approach between climate scientists and the 
very people who are actually running financial and risk 
management at these organizations and gathering additional data 
and modifying existing models.
    This work should commence, and only when the results have 
been deemed to conform to regulatory model risk standards 
should consideration of the disclosure and use in financial 
decision-making be permitted.
    Thank you for your time, and the invitation to testify on 
this important matter, and I look forward to answering your 
questions.
    [The prepared statement of Dr. Rossi can be found on page 
95 of the appendix.]
    Chairman Perlmutter. Thank you, Dr. Rossi.
    And thank you to all of the panelists. You were all right 
on time or a little early. So, I appreciate that.
    I will now recognize myself for 5 minutes for questions. 
And we will get through as many of the Members as we can before 
we have to break for votes. We might be lucky and get through 
all of us. We will see.
    Dr. Rossi, I want to just start with where you have left 
off. And I think we would agree. A number of us on this 
committee are also on the Science Committee, and yesterday we 
had a hearing on the science of wildfires or wildfire 
predictions, mitigation, and a whole variety of things. And I 
don't think we would disagree with you that we don't have all 
of the science we would like to predict wildfires.
    In Colorado, we had our worst wildfire season ever last 
year, and most of the Northwest is frying right now. But, in my 
opinion, that is not a reason to not begin to put precautions 
in place.
    So, Dr. Cleetus, Colorado, as I just said, had its worst 
wildfire season on record. The three largest wildfires in our 
State's history occurred in 2020, torching over 540,000 acres.
    Climate change is now forcing Colorado and many other 
States to prepare for larger and more destructive wildfire 
seasons. In fact, the director of the Colorado Division of Fire 
Prevention and Control just remarked, ``We are having fire 
years, not fire seasons anymore.''
    In the West, we have wildfires. The Gulf has hurricanes. 
There is increased flooding in the South and the Midwest. And 
these changes are having a significant impact. The smoke that 
comes into the Denver area from the wildfires either in 
Colorado or the West is affecting our tourist industry and our 
housing industry.
    As the severity and frequency of extreme weather events 
continues to rise, how will the housing market react? And what 
does it mean for homeowners in climate-sensitive areas?
    Ms. Cleetus. Yes, as you are pointing out, the reality is 
that this is not some distant future. These climate impacts are 
here and now. And it is very clear from the science that 
hotter, dryer conditions in the West are contributing to these 
longer, more intense fire seasons. It is undeniable. And, 
unfortunately, the uncertainty, to the extent it exists, seems 
to be breaking in the wrong direction.
    This is why the precautionary principle that the other 
panelists highlighted is so important. We are talking about 
managing risks; we cannot avoid them completely.
    And what we are starting to see is the insurance market 
reflecting this risk with wildfires, where we have seen 
insurers drop policyholders, or try to raise rates. State 
regulators have had to step in with stop-gap measures. We have 
thousands of homes at risk right now in the West, millions, 
actually, if you look across all of the States in the American 
West. And this risk is growing, both because of climate change 
and also our development patterns and how we manage our 
forests.
    So, we have to act on all fronts to make sure that we 
contain this risk. Otherwise, both the economic consequences, 
as well as the public health and human toll, will rise every 
year, unfortunately.
    Chairman Perlmutter. Thank you for your answer.
    Several of us on this committee--I was a bankruptcy lawyer 
representing financial institutions for many years, and we have 
individuals who were bankers or bank regulators on this 
committee. And the failure of Pacific Gas and Electric, the 
failure of many oil and gas companies and their bankruptcies, 
make me concerned about the impact on the financial industry.
    So, Ms. Rodriguez Valladares, 2 years ago this subcommittee 
held a hearing about how leveraged lending may pose a threat to 
financial stability. As you know, leveraged loans are 
characterized as corporate debt extended to highly-indebted 
non-financial businesses.
    How does leveraged lending interact with climate risk? And 
what types of institutions are particularly exposed?
    Ms. Rodriguez Valladares. This is really a very good point 
that you make. I have published 40-some-odd articles about 
leveraged lending and collateralized loan obligations, and we 
should definitely be very concerned, because American companies 
are more leveraged than they ever have been historically, 
either in aggregate amounts or when you see it as an equivalent 
percent of gross domestic product (GDP).
    And there are incredible interconnections because a lot of 
these companies, especially in the energy sector, which 
presently is exhibiting a very, very high default probability, 
are incredibly vulnerable to extreme climate events.
    And there is a lot of opacity in leveraged lending and 
collateralized loan obligations, and there are a lot of 
interconnections between the non-banks such as hedge funds and 
private equity, home offices, and other types of financial 
institutions of that nature. They are very interconnected to 
banks. They hold a lot of these leveraged loans and a lot of 
these securitizations.
    We definitely need to be very, very mindful about their 
probability of default, and especially those companies that are 
imminently affected either by the physical or the transition 
risks.
    Chairman Perlmutter. Thank you very much for your response.
    My time has expired. I now recognize the ranking member of 
the subcommittee, the gentleman from Missouri, Mr. Luetkemeyer, 
for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Rossi, in your testimony you have a graph in there, 
``Long-Term Changes in the Earth System.'' And the first graph 
talks about land surface temperatures, and it starts out at 
1850.
    And it is interesting, because that seems to be where most 
people who want to talk about climate change want to start, is 
1850. It is interesting, because that is actually the trough of 
the cold trend that started at that point--or ended at that 
point. If you actually take the chart and you go back 1,000 or 
2,000 years, you see this wave effect.
    And so what I am saying is, if you take that chart and go 
in the other direction, which is what we are trying to talk 
about today, actually within the next probably 25 to 50 years, 
you are going to see the wave start going in the other 
direction.
    And we are talking here today about modeling. If you are in 
the banking business and you are trying to model what your 
risks are with regard to climate change, if you go back 5 years 
or 50 years, it is one thing, and if you look forward 5 years 
or 50 years based on what you saw in the past, that is really--
you need a crystal ball to look at all of the things that have 
happened in our economy and the world in the last 5 years or 50 
years. And then try and project that to the next 5 years or 50 
years and look at--and you throw in there the technology and 
things like that.
    How do you, Dr. Rossi, analyze this when you look at the 
fact that this wave could actually go in the other direction? 
And we are looking at trying to model this so we actually get 
an assessment of true risk. How can you do that? You just got 
done talking about how you didn't think that could actually 
work. Could you elaborate on that a little bit? Am I wrong in 
my assessments here?
    Mr. Rossi. No. And as someone who actually either developed 
or oversaw the development of such models in the past, either 
loan loss reserving models or stress test models, I can tell 
you for sure that this is probably one of the most difficult, 
if not the most difficult exercise that banks will face in 
estimating or assessing risk in their portfolios.
    As for all the reasons that you just described, in the case 
of credit risk or market liquidity or these other risks that 
are out there, we can get our arms around that pretty readily 
because we have that data, we have that historical time series, 
that is, to be able to kind of ingest that into our financial 
and risk models and project out how much capital we will have.
    When we are talking about taking physical outputs, such as 
how many gigatons of greenhouse gases are spewed out, and 
trying to translate that into macroeconomic factors that then 
translate in turn to how much risk is on our lending or 
investment portfolios, that is what we are talking about as 
being extraordinarily difficult to do.
    And keep in mind that when we do that, we are today really 
only going out, as was said earlier, 9 quarters forward on our 
stress test, so trying to go out 5 years or even 10 years, or 
more than that creates an enormous amount of uncertainty, such 
that if we are trying to estimate the tail of the distribution, 
as other witnesses have talked about, the tail of that 
distribution is so noisy, it would be very, very difficult to 
quantify that with any degree of reliability.
    And personally, as someone, as a former CRO, signing a sub-
attestation, I would not today, given where the state of 
climate models are today, sign any sub-attestations related to 
climate risk.
    Mr. Luetkemeyer. If you take that one step further then, 
the concern that we need to be thinking about here is if you 
destroy the fossil fuels industry based on this graph showing 
continued warming, and all of a sudden in a few years it turns 
the other way, we have destroyed an industry that we definitely 
need and are going to need in the long term for many different 
reasons.
    It would seem to me that we need to be very careful how we 
go into this modeling situation. Would you agree with that?
    Mr. Rossi. I would agree with that. And I want to be clear 
here. I am not saying not to do anything--I am not saying that. 
I am saying that we need to start in a very methodical fashion. 
There are things that we can do today that aren't going--
leapfrogging to, let's adopt what is in these IAMs and climate 
models today and just start to implement stress tests and--
    Mr. Luetkemeyer. Mr. Rossi, let me quickly interject here.
    You talked about some things we could do. Would you 
identify things that financial institutions or regulators, what 
significant data things they can put together today to actually 
make it work?
    Mr. Rossi. Yes, absolutely. First and foremost--and I am a 
simple-minded guy when it comes to these things--is to do what 
you understand right now.
    What banks can understand right now are the positions on 
their portfolios that are exposed to different climate events. 
They can actually engage with vendors that are out there that 
can supply this information that can help them assess what 
their exposure is to wildfire risk or drought or flooding, and 
they can size that up in terms of the probability of those 
outcomes, as well as the impact or the severity of those 
outcomes. They can do that today.
    The other thing that they can do is to start to do what I 
have done in an academic research paper that will be published 
later this year, to actually try to tie, to determine these 
empirical linkages between physical outputs, let's just say 
hurricane impacts, severity and frequency of hurricanes, to, 
let's say, mortgage default. Trying to establish those 
empirical linkages will be extraordinarily important to 
actually getting a better handle on estimating what this 
climate risk looks like on these bank portfolios.
    Mr. Luetkemeyer. Thank you for your response. I am out of 
time. Thank you, Dr. Rossi.
    Chairman Perlmutter. Thank you, Dr. Rossi, and Mr. 
Luetkemeyer.
    The Chair will now recognize Mr. Foster, who is the only 
physicist in Congress. But apparently, he is going to yield to 
Mr. Casten, an engineer.
    Mr. Foster. Thank you. And I yield to Mr. Casten.
    Mr. Casten. Thank you, Mr. Physicist.
    I truly hope we are not still arguing about whether climate 
change is real. My goodness, the science is so settled. We know 
the last time CO2 was this high. Sea levels were 50 feet 
higher. Let's move on.
    If you don't believe the scientists, listen to Fed Governor 
Lael Brainard, who said in January that the science is settled 
but the impact on our financial sector is highly uncertain, 
that we should be concerned about the impact of rapid repricing 
events. I am partially misquoting that.
    We had Jamie Dimon in a couple of weeks ago, and he said 
that JPMorgan is not reducing their fossil fuel exposure. And I 
said, ``Okay, have you changed your senior debt, sub debt 
equity level?'' He said, ``No, not yet.'' And I said, ``Can I 
assume that you will once you see things coming?'' And he said, 
``Oh, absolutely.''
    So my first question for you, Mr. Rothstein, is, we know 
once these changes come, the sophisticated players will see it 
coming first and we will have capital movement in the system.
    Can you explain to us the difference between stress testing 
the banks and scenario modeling the system, and how you think 
we should be balancing those two to make sure that our system 
is robust and continues to be robust?
    Mr. Rothstein. Thank you, Congressman. And thanks for all 
of your leadership on this issue.
    We have a very diverse system with thousands of banks, and 
while the biggest banks, obviously, are responsible for the 
loans, most people operate with small banks. They have to 
operate in a very concentrated area. They are more at risk for 
physical risk because they tend to loan within a 5- to 10-mile 
area.
    We did an analysis of the largest 20 banks and looked at 
their syndicated loan portfolio, just to use the same 
methodology that the European Central Bank did, and for that we 
identified over half-a-trillion dollars of exposure.
    What we need to do is use every tool. Climate change is an 
all-of-government initiative, it is an all-of-society 
initiative. We have to do stress tests on individual bank 
portfolios and then we have to look at scenario analysis for 
the whole system, both small and large.
    Mr. Casten. I want to follow up, because your point about 
small banks intrigues me, because there is the physical risk 
that at least we think we understand--there are lots of ripple 
effects--but then there is the transitional risk that shifting 
wealth from energy producers to energy consumers is good for 
Americans, but it creates our political tension. And I find 
myself thinking, is the First Bank of Frankfort, Kentucky, 
going to be okay?
    Does this feel more like the S&L crisis than the 2008 
crisis to you, as we think about how diverse the exposure is 
going to be in the system?
    Mr. Rothstein. I believe, Congressman, that the exposure is 
even broader and more systemic than either of those.
    For a small bank, they could be affected on physical risk 
if they are in an area with fires, floods, or tornadoes. But 
they also could be if they are in an area that is an energy-
producing community and the jobs decline in that sense.
    Last year, the oil companies wrote off $145 billion of 
assets in the first 3 quarters. That is banks, insurance 
companies, and investors that are somehow dealing with that, so 
this is a deeper and wider potential area of exposure than any 
of those.
    Mr. Casten. As I pointed out recently, ExxonMobil didn't 
write off all of that money because they were woke.
    I want to shift, if I could, with the little time I have 
left, to Ms. Rodriguez Valladares.
    I really appreciated your comments. I was in the energy 
industry for 20 years before I got here, and we used to joke 
that you could always tell that there was a downturn coming in 
the energy sector because the big banks started creating 
special purpose energy opportunities funds for--that was the 
thing they were doing to move assets into non-Dodd-Frank-
compliant vehicles.
    Assuming that we pass this legislation, including my bills 
that are noticed in this markup, and the Biden White House 
moves, we are probably 2 years away, realistically, from 
getting all of these changes implemented.
    I don't know what you think of my own metric, but are there 
metrics you think we should be watching in the financial system 
that will be a sign that the sophisticated players are starting 
to offload risk onto other players?
    What are the red lights you are watching that you think we 
should be paying attention to in these next few years?
    Ms. Rodriguez Valladares. One thing, of course, is to watch 
whether banks are increasingly selling their loans that are 
exposed to climate change. Are they selling their commercial 
real estate loans, ag loans, energy loans to special purpose 
vehicles? Then that tells you that they are trying to get rid 
of that risk because it weighs on their capital and their 
leverage requirements.
    I think also watching the number of loans that they 
underwrite to these sectors that are so sensitive to climate 
change is also another important signal.
    But it is not just about banks' exposure to these kinds of 
companies from the lending side. Let's not forget that banks 
also are in financial derivatives and repos with these 
different kinds of companies, to also see whether that is 
lessening. That is another signal that they feel that this is 
of concern.
    I am a little concerned about some of the comments that I 
am hearing that we have no data to be measuring climate change 
risk and how it can affect default probabilities or how it can 
affect market volatility, because if there is one thing 
Americans are known for, it is for data.
    Chairman Perlmutter. I am going to interrupt you, and 
somebody else will let you finish your answer to that question. 
But thank you very much for your testimony.
    And I thank the gentleman for his time.
    I now recognize the gentleman from Oklahoma, who is also 
the ranking member on the House Science Committee, Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman.
    Today's hearing is an opportunity to have a constructive 
dialogue on the issue of climate risk in the financial system.
    We know that the climate is changing and that global 
industrial activity has played a role in this. Further, I 
believe my friends on the other side of the aisle would agree 
that Congress and the regulators still have much to learn about 
the implications of climate change in the financial system. 
However, the argument that we are in a race against a ticking 
climate Doomsday Clock is counterproductive to achieving real 
progress on this issue.
    The United States has already made progress in the science 
and innovation needed for cleaner energy production. 
Weaponizing the financial regulators to drive capital away from 
fossil fuels, still the most reliable and essential form of 
energy in the United States, would have dire consequences for 
the economy and U.S. competitiveness abroad.
    Instead, we need a more thoughtful approach based on the 
current state of climate risk assessment tools.
    Dr. Rossi, the electric power grid is absolutely essential 
to the U.S. economy, generating the energy needed for 
businesses and families across the country. In 2020, fossil 
fuels were the largest source of U.S. electricity generation, 
at about 60 percent. Nuclear energy was the source of roughly 
20 percent.
    So, Dr. Rossi, could you speak to the potential 
consequences to the U.S. economy if we see a rapid government-
driven disinvestment away from fossil fuels and nuclear energy?
    Mr. Rossi. Yes. In the near-term, we could see several 
things.
    First of all, let me give you some perspective. These are 
numbers--I have been looking at Citigroup recently, and a 
little while ago, they released their climate financial 
disclosure for this year, and it was very interesting. One of 
the things that they flagged was their oil and gas exposure of 
something in the order of 50-plus billion dollars or so, pretty 
sizeable, but only about 6 or 7 percent of their overall 
exposure.
    Why that is important is because imagine now if you have 
multiple banks, just like what happened during the liquidity 
coverage ratio implementation several years back when banks 
were looking at trying to measure how much liquidity they had 
on their balance sheet from a regulatory requirement standpoint 
and found that they were--some of the largest banks were 
certainly not in compliance.
    And what would they do? They would have to then rotate out 
of some of their lesser high-quality assets into higher-quality 
assets. They would have to sell mortgage-backed securities in 
order to try and comply by buying U.S. Treasuries.
    In this case, divesting from oil and gas investments would 
actually have a further amplifying effect, downward movement 
effect, that is, for some time period, which would actually 
cause the prices of oil and gas to go down, those securities, 
and in addition would--temporarily anyway--impose some harm to 
the balance sheets of these banks.
    Now, I am not saying it is crushing by any sense. They are 
well-capitalized. So, that is not going to be an issue.
    But from a knock-on effect standpoint, we are talking about 
impacts associated with lack of investment if banks aren't 
lending again to oil and gas companies, their inability to do 
the kind of exploration that is needed to continue to provide 
us with the supply necessary to have heating and having to fuel 
our cars, and that sort of thing.
    So, it would have adjacent effects on increasing prices to 
consumers for things like utility bills, prices at the gas 
pump, et cetera, and so certainly would have adverse 
consequences in the near-term for that.
    Mr. Lucas. Continuing with you, Dr. Rossi, you explained in 
your written testimony how climate credit default swaps could 
be utilized as a risk-mitigation tool for climate-related 
events. Could you discuss further how this financial tool could 
be used?
    Mr. Rossi. Sure. The idea here is simply--and I think one 
of the other witnesses mentioned the use of financial 
derivatives by financial institutions. And during the financial 
crisis, I think Warren Buffet famously said something to the 
effect of, these were weapons of financial mass destruction.
    Actually, derivatives are an important risk-mitigation tool 
that are used extensively in the industry for things like 
transferring credit risk to private investors, such as what is 
going on with the Government-Sponsored Enterprises (GSEs), 
Fannie Mae and Freddie Mac, in transferring credit risk off 
their balance sheets and onto other private investors.
    In the case we are talking about here, we have had for many 
years weather derivatives, rainfall derivatives, and we have 
had temperature derivatives that have not really kind of taken 
off much in the industry.
    But as climate change accelerates and continues to evolve, 
we need to think about developing credit- or climate-related 
derivative tools that could remove that risk off of these 
balance sheets.
    You could imagine that both Fannie and Freddie, for 
example, that are engaged heavily in credit risk transfer of 
their securities to--or of their mortgage losses, that is--are 
exposed increasingly, potentially, to more hurricanes and 
flooding events if and when that occurs from climate change.
    Being able to transfer that off directly by way of what is 
called a climate derivative instrument, just like a credit 
default swap (CDS), where there is a buyer and a seller in that 
market for that, a bank or a GSE could, for that matter, buy 
protection from a seller on the other side, and that is how 
that climate derivative could actually function.
    Chairman Perlmutter. Thank you, Dr. Rossi.
    Mr. Lucas. Thank you, Mr. Chairman.
    Chairman Perlmutter. The gentleman's time has expired.
    Mr. Vargas, the gentleman from California, is now 
recognized for 5 minutes.
    Mr. Vargas. Mr. Chairman, thank you very much for holding 
this hearing.
    I want to thank all of the witnesses for being here today. 
I found this very informative.
    Dr. Rossi, have you ever seen hearings like this before 
with Congress, when you have witnesses testifying?
    Mr. Rossi. I have actually testified twice before, yes.
    Mr. Vargas. The way I think it usually works is this way. 
You have one side, it doesn't matter, but one side will say 
something, and then, if they are in the Majority, they will 
have two or three witnesses, and then the last witness will say 
just the opposite.
    It is sort of analogous to the issue: Do cigarettes cause 
cancer? Yes, they do, and they destroy your lungs. And the next 
one: Oh, yes, they cause cancer, yes, they do. And then the 
last guy always says: No, they are healthy. They keep you thin 
and fit.
    But in this case, I think that almost everyone agrees that 
climate change is real.
    Now, I have been arguing this point for decades, and I have 
had a hard time with some of my colleagues on the other side 
accepting it. And I think you said it until I heard you say, 
from some of the examples given by my friends on the other 
side, well, this kind of happens in history, you kind of go one 
way and then the other way.
    Do you think that climate change today, a large part of 
that is because of human actions and what we do?
    Mr. Rossi. I do. And that is based on the fact that I work 
on a fairly regular basis with climate scientists now at the 
University of Maryland and I have seen the data. I am not a 
climate naysayer. And I don't know that folks on the other 
side, of your side, are either.
    I think what we are trying to figure out, though, is how 
best to move the ball along in a way that doesn't destroy the 
economy in the short term, while making sure that we have what 
we need to protect everybody from climate change.
    Mr. Vargas. I have to tell you, I think that is a big step 
forward, honestly. I think that is a big step forward, just 
saying that the science is settled. Because, again, I hear some 
of my friends on the other side say, well, wait a minute, but 
it does this all the time, and we can't really do much about 
it, it will destroy our economy, it will destroy our world if 
we try to do anything about our actions.
    You don't agree with that?
    Mr. Rossi. I would say that there are long-term 
climatological effects that have occurred throughout thousands 
of years, and that there is no dispute. I also don't think that 
there is any dispute that there are human-based changes that 
have occurred over the last 150 or so years based on the data 
that I have seen.
    At the same time, we do need to take care about how we move 
forward, because the models underlying that have significant 
issues. I don't think we are debating the climate change; we 
are debating how we can best implement them into financial 
models.
    Mr. Vargas. I think I understood your testimony well, and 
you said you have the shiny models and you chase the shiny 
thing. You find out the shiny thing is going to hurt you 
because it is not modeling it right, and you can do real damage 
to the economy and these large companies and other companies. I 
think I understood that.
    And I appreciate your testimony, I really do. I think it is 
a huge step forward.
    Dr. Cleetus, you said that back in 2020, the nation 
experienced nearly 59,000 wildfires, which burned approximately 
10 million acres. About 40 percent of that was in California, 
and CAL FIRE now says that 3 million homes are at risk in 
California, so much that, in fact, we have to do something.
    What can we do? I have a bill that passed out of here with 
others about at least disclosures, at least disclosing this 
information. Don't you think that is a good idea, at least 
doing that?
    Ms. Cleetus. I think this is the main problem here. We have 
a real information asymmetry going on in the financial sector.
    Believe me, there are sophisticated actors in the financial 
sector who have proprietary data sets. They are moving their 
assets around. It is the ordinary public that is being left 
exposed, the taxpayer that is being left exposed.
    We have done some research just using publicly-available 
data from NOAA, tide gauge data, looking at sea level rise and 
the risk to coastal property.
    What we found was that over 300,000 homes and commercial 
properties with a collective market value of $136 billion today 
are at risk just by 2045. That is within the lifetime of a 
mortgage issued today. There is someone who is going to be left 
holding the bag when those houses start to flood.
    Mr. Vargas. I want to interrupt you just for a second to 
give Ms. Mayra Rodriguez Valladares an opportunity to tell us 
about that data you were talking about.
    I have 23 seconds. Go ahead.
    Ms. Rodriguez Valladares. We have a lot of data in the 
United States, both from scientists, so we have just hundreds 
of years of scientific data that can be used, and we also have 
a lot of different kinds of probability of default data. We 
have incredible professionals in quantitative fields both in 
and outside of financial institutions.
    There is a lot there that we can be doing to model climate 
change risks. And models are dynamic. We should be working on 
that already, and not wait until it is too late.
    Mr. Vargas. Thank you. My time has expired.
    Thank you very much, Mr. Chairman.
    Chairman Perlmutter. Thank you, Mr. Vargas.
    Votes have been called, but I think we can get through the 
questions of Mr. Posey, Mr. Lawson, Mr. Barr, and Mr. Kustoff. 
So, those of you who aren't going to be asking questions can go 
vote, if you choose.
    I would now like to recognize the gentleman from Florida, 
Mr. Posey, for 5 minutes of questioning.
    Mr. Posey. Thank you very much, Mr. Chairman.
    Dr. Rossi, we are here today to explore an expansive role 
of the government in our economy to reduce systemic financial 
risk. History suggests that government has repeatedly missed 
the mark on ensuring such financial stability.
    What assurances do we have that government can and will do 
better than the private sector and individuals in assessing and 
responding to potential financial risks posed by climate 
change?
    Mr. Rossi. If what you are asking is about whether or not 
we can regulate climate change by way of financial 
institutions, I think that is a tricky problem to address, 
because on the one hand, as we were talking about earlier, 
forcing divestment, for example, or some variation of that from 
financial institutions out of oil and gas would very much have 
a negative impact.
    And so, from a safety and soundness standpoint, when we 
think about what the role of those safety and soundness 
regulators are, they are there to ensure that the long-term 
viability of those financial institutions is, in fact, intact.
    Forcing them to implement some sort of changes in the way 
in which they are balance-sheeting certain asset types is 
certainly not consistent with the way in which our economy or 
our financial system has gone in the past.
    That is an issue that I see associated with that.
    Mr. Posey. Thank you.
    To follow up on that, Dr. Rossi, we have in recent history 
faced some pretty large shocks. I recall the large oil price 
shocks from OPEC that plagued us for years before we attained 
our recent energy independence.
    Looking over our shoulder literally right now at COVID-19, 
should we really start selecting out the risks of the day, like 
climate change, and build an entire new regulatory apparatus 
around them?
    Mr. Rossi. Here's the thing. Climate risk, depending on 
whom you talk to, is a fairly long-tailed risk. It is not one 
you could say, okay, today we had 115-degree temperatures in 
Portland and Seattle. There is a difference between weather and 
climate. So, those things might, in fact, turn out to be 
predictive of longer-term climatological changes.
    But what I will say from a risk-management standpoint is, 
from a banking perspective, there are risks that we--financial 
risks, market, credit, liquidity risks that we need to be 
managing, and banks do manage those very effectively today, 
credit risk. And then the nonfinancial risk, in which I would 
include operational risk, those actually are things that also 
have to be addressed.
    Mr. Posey. People like to talk about risk, and there is a 
reference to the risk that government climate regulations might 
pose in the Chair's memo for this hearing.
    I recall that Milton Friedman said, ``The Great Depression, 
like most other periods of severe unemployment, was produced by 
government mismanagement rather than by any inherent 
instability of the private economy.''
    Isn't there a rather large risk about regulators who get it 
wrong on climate risks like they did in mismanaging the money 
supply in the Great Depression? And should we--
    Mr. Rossi. Well--
    Mr. Posey. Go ahead.
    Mr. Rossi. I'm sorry. Absolutely. I do think that there is 
exactly that type of risk until we are armed with the 
information that would give us the degree of reliability that 
we have those risks understood.
    And all of the risks that I just mentioned earlier, the 
financial risk, the nonfinancial risk that banks are on point 
to manage today in their day-to-day operations, there is a 
wealth of historical information from which they can draw upon 
to be able to make those assessments.
    I will say that the one that they have the most difficulty 
with is the risk associated with operational risk, because we 
just don't have that type of data there.
    And if we don't have the right type of data there, and we 
have been dealing with operational risks for many, many years, 
imagine the issues that we have associated with trying to get 
our arms around and quantify climate risk impacts from a 
physical and transition risk standpoint.
    That is extraordinarily difficult. And anybody who will 
tell you that the data exists for banks to be able to make very 
precise estimates and make hard money decisions on that, I am 
just not a buyer on that.
    Mr. Posey. Okay. Thank you very much, Dr. Rossi.
    I see my time is about to expire. And so, Mr. Chairman, I 
yield back.
    Chairman Perlmutter. Thank you, Mr. Posey.
    I now recognize another gentleman from Florida, Mr. Lawson, 
for 5 minutes.
    Mr. Lawson. I would just like to say to my colleague, Mr. 
Posey, that we worked so hard, because of natural disasters in 
Florida, on citizens establishing a government-run insurance 
program to make insurance available.
    And this is to everyone. The effects of climate change, as 
seen year after year, are strong, and more frequently, natural 
disasters are destroying homes and businesses at record-
breaking rates.
    In 2018, Hurricane Michael hit the Florida Panhandle where 
I am, causing approximately $25 billion in damage and 
devastating our local community. Only a few months after 
Michael hit, we saw property insurance rates increase, leaving 
some Florida homeowners unable to find affordable policies.
    What steps should Congress ensure be taken to address these 
issues, because they come every time? And we were devastated in 
Florida after Andrew, and even Michael, and it is just never 
going to stop. But we have to do something here in Congress to 
make things happen.
    This question is posed to everyone: What do you think we 
should be doing in Congress?
    Ms. Cleetus. If I could jump in, I think that there are two 
really important things going on here. One is that we are 
seeing in a systemic way these risks rising over time, as you 
pointed out. And the other is that we have many, many people, 
low-income folks, fixed-income folks, who are being really 
harshly punished by the financial consequences of these 
disasters.
    In terms of insurance, we need to make sure that more 
people are carrying insurance in the first place. It needs to 
be more widely available, and more affordable. But at the same 
time, we need to recognize that some of these risks over time 
are going to become inherently uninsurable in some of the 
highest-risk places.
    So, we have to create other pathways out of risk for 
people. There are so many, many people on the front lines of 
this risk. In the State of Florida, for example, we have to 
create pathways out of risk, because right now it is not just 
having financial consequences, but taking a real toll on 
people's lives and their well-being.
    Mr. Lawson. I have a little bit of a follow-up. Many 
residents quickly found out, as you stated earlier, that their 
policy didn't cover the damage caused by rising waters. Climate 
risk is not adequately priced in the housing market. 
[Inaudible] Found that current home prices, mortgage interest 
rates, and guaranteed fees in the secondary mortgage market did 
not make much sense either.
    There are a lot of concerns about rising water playing a 
role in property values. What should Congress, the GSEs, and 
the housing agencies be doing to address this concern?
    Ms. Cleetus. I think in the first place, it is really 
important to evaluate the risk fairly and communicate that risk 
to the public. We need better flood risk maps that actually 
communicate this information to the public so that they can 
make informed decisions about what is likely to be their single 
biggest asset.
    Right now, we have large swaths of the public who are 
largely unaware of how serious these risks are and how quickly 
they are coming.
    The other piece of this is really building in an equity and 
justice component into our climate resilience policies, because 
we are seeing communities of color get gentrified out of their 
communities, and we are seeing resilience investments that 
benefit an elite few and not the broader public. And that needs 
to change as we go forward, because these risks are now 
affecting way too many parts of our country.
    Mr. Lawson. Dr. Cleetus, you also testified that we can fix 
the climate crisis. [Inaudible] Which I am not sure, if we 
don't build justice and equity into our solutions from the 
onset.
    Will you please elaborate a little bit more on that, and 
how can the whole-of-government approach be undertaken by 
Treasury Secretary Yellen and the National Economic Council 
(NEC) and others through the recent climate financial Executive 
Order to inform our approach here?
    Ms. Cleetus. I think we ought to start with the fact that 
our current market outcomes inherently have baked into them 
years of structural racism and social-economic inequities. We 
have had communities that haven't been able to build 
generational wealth because of the legacy of mortgage redlining 
and the lack of access to credit, as just one example.
    And that means, when you have climate risk coming on, they 
are coming on as a layer of additional risk over these 
longstanding problems. As we create solutions, let's not have 
Band-Aids on top of the current system. Let's actually be 
thinking about a more fair and equitable system that keeps 
people safe, for everybody, not just for a few.
    Mr. Lawson. With that, Mr. Chairman, I yield back.
    Chairman Perlmutter. Thank you, Mr. Lawson.
    We will get through Mr. Barr's questioning, and then I 
think we can adjourn this panel.
    I would now recognize the gentleman from Kentucky, Mr. 
Barr.
    Mr. Barr. I thank my friend, the chairman of the 
subcommittee, and I appreciate the testimony of the witnesses.
    I know that fighting climate change is in vogue and 
everyone wants in on the action. But count me as someone who is 
a skeptic that increasing bank capital requirements or 
punishing lenders for not redlining energy companies is the way 
to go about it.
    My colleagues and also some folks in the Administration 
clearly want to weaponize the blunt instrument of bank capital 
requirements to force a precipitous and unrealistic and, I 
would argue, uneconomic transition away from fossil energy.
    The problem is, this will do nothing to change demand. 
People will still need to drive cars, turn on their lights, and 
heat their homes. And the Biden Administration's own data shows 
that fossil energy will still make up more than 70 percent of 
consumption in 2050.
    These efforts will just disrupt the supply side by shifting 
financing for those industries to less-regulated non-bank 
lenders, drive up the cost of capital, and raise prices for 
consumers.
    Now, I know some of the witnesses want our regulators to go 
beyond just banks and go into non-bank financing as well. But 
combine all of this with data aggregated by the Bank for 
International Settlements which shows that increases in capital 
requirements lead directly to reductions in lending and it 
becomes clear that this effort is not about managing financial 
stress, but it is really about causing financial stress, 
specifically to those companies and industries that are 
politically unpopular.
    Dr. Rossi, what impact would the assessment of capital 
surcharges, like those detailed in the draft Climate Crisis 
Financial Stability Act, have on lending to fossil energy 
firms?
    Mr. Rossi. You have hit on many of the points that I would 
make. I think the first one that I would mention is that 
raising capital, first of all, will squeeze out lending in 
other segments, particularly in that segment.
    If you are talking about, as I have seen, 150-percent risk 
rate associated with oil and gas investments as one of those 
proposed bills has in it, I would be concerned, first of all, 
as to where does that 150-percent risk rate actually come from? 
What is the empirical basis for that?
    Because if you can imagine what that means, we are talking 
about significant amounts of capital being dedicated to 
investments in oil and gas which have knock-on effects, as I 
mentioned earlier, in terms of lack of ability through lack of 
lending to be able to go out and do the kind of oil and gas 
exploration that is needed to keep us protected against having 
to go elsewhere abroad for our fuel needs.
    Mr. Barr. I do think there is a risk here that by choking 
off financing to some of these energy companies that are really 
at the forefront of innovation in carbon capture and other 
technologies, that this could actually be very 
counterproductive.
    And it does look like an effort to exploit climate as an 
excuse to justify a move towards government central planning as 
opposed to an effort to help deploy capital to innovative 
companies that actually might ameliorate emissions and decrease 
emissions.
    Let's talk about systemic risk for a second. There is an 
important distinction between systemic risk and business risk. 
Systemic risk has a very specific definition: A certain 
activity or entity has the potential to actually bring down the 
entire financial system without enhanced supervision. But 
business risks are the countless risks firms manage every day, 
that if not mitigated properly, may have an impact on their 
bottom line.
    No one is denying the risk of changing weather patterns, 
and, in fact, banks, insurers, and other financial firms are 
already managing them as traditional business risk.
    It is hyperbolic to suggest, as some of my colleagues and 
vocal advocates have, that climate change, a phenomenon that 
occurs over literally decades, can somehow suddenly and 
precipitously overwhelm the banking system, the insurance 
sector, and the reinsurance sector, especially when you 
consider that a lot of the stress testing happens only over 9 
quarters.
    So, Dr. Rossi, how are banks currently managing climate 
risk, and are they capable of effectively managing it without 
prudential supervision?
    Mr. Rossi. I am going to take you back, Congressman, to the 
earlier comment that I made about this with regard to 
Citigroup's climate disclosure.
    Now, again, I don't work at Citigroup any longer, but 
having looked at that just objectively, I would say that is a 
really good first step in the process.
    They have gone through and they have identified where their 
climate risk exposures are, and they have identified the 
governance and the processes and controls that are necessary to 
manage climate risk. And they are doing it fairly 
comprehensively. Again, you are talking about a far-flung 
portfolio reaching out to many, many countries in terms of 
their investments.
    I think they are on the right track, and I am sure all of 
the other big banks are on a similar path to do that.
    Mr. Barr. My time has expired. If I could just--if the 
chairman would just indulge one final comment.
    We talk about transition risk. A lot of these bills that 
are being proposed by this hearing, I think create the 
transition risk.
    Chairman Perlmutter. The gentleman's time has expired.
    Mr. Barr. I yield back.
    Chairman Perlmutter. I thank him for that one additional 
comment.
    I would like to thank the witnesses.
    I think there is agreement here that there is some real 
risk in the financial system. And I think the question is, how 
long of a horizon can we really analyze and determine?
    But there is no question that there is risk here. I think 
all the panelists would agree.
    And I just appreciate the testimony. I am sorry that it has 
been kind of a rushed afternoon. I want to thank you all for 
your testimony and for devoting the time and resources to share 
your expertise with this subcommittee. Your testimony today 
will help advance the work of our subcommittee and of the 
House.
    The Chair notes that some Members may have additional 
questions for these witnesses, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned, and I thank the witnesses. I 
am going to come down and thank you personally.
    And to those of you on the screen, thank you very much. 
Your testimony was really appreciated.
    And, again, we are in the middle of a very busy afternoon, 
so we really appreciate you being here. Thank you.
    [Whereupon, at 3:28 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             June 30, 2021
                             
                             
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]