The CFTC Should Remain Neutral on Climate Change

It was bound to happen sooner or later. The political crusade associated with climate change has become so institutionalized that it has now arrived at the doorsteps of even one of Washington’s most pedestrian financial regulatory agencies, the Commodity Futures Trading Commission.

This month, the CFTC, the Republican-led regulator that oversees the nation’s futures markets, entered into the political fray surrounding climate change, releasing a task force report urging all financial regulators, including itself, to “move urgently and decisively” to confront the “serious emerging risks to the U.S. financial system” posed by such forces of nature.

The report follows on the heels of a CFTC vote taken last year at the behest of one of its Democratic commissioners to establish a “Climate-Related Market Risk Subcommittee” to “identify and examine climate change-related financial and market risks,” and illustrates the way political agendas quickly metastasize throughout the corridors of official Washington.

While climate change is a concern to many in government, it is not immediately clear why it is to the CFTC, whose mission is to regulate a sector of the financial markets involving rather exotic financial instruments such as futures and swaps, and whose expertise does not extend to the atmosphere.

Potential Problems With CFTC Entering the Debate

That is, why does the CFTC want to insert itself into this politically fraught area, and what does it bring to the table?

These are pertinent questions, because establishing a forum within an independent financial regulatory body like the CFTC to address such an issue raises a number of potential problems.

The first has to do with the mission of the CFTC, which is to oversee the financial derivatives markets. To the extent those risks require disclosure to investors, as proponents urge, such information is relevant primarily to the financial products that underlie such derivatives, not to the derivatives themselves.

The second problem relates to the lack of market failure. According to press accounts, the chairman of the subcommittee, a Goldman Sachs alumnus no less, opined that “[f]inancial markets today are not pricing climate risk,” and that “[u]ntil this fundamental flaw is fixed, capital will flow in the wrong direction.”

Really? Does anyone familiar with how futures markets operate really believe that they are unable to offer financial instruments to hedge against such risks? If so, this must be news to those who participate in such markets, including farmers, food producers, energy producers, and other investors, which for more than a century have been able to hedge against (or profit from) the very kind of weather-related events that climate change poses.

A third problem has to do with the lack of credentials and expertise of the members of the subcommittee. Members include officials from “U.S. banks, asset managers, academia and environmental groups.”

In other words, few economists, and no members of the scientific community, the two most relevant fields for addressing this subject. This lack of relevant expertise is compounded by other red flags going to the commercial, and in one case, blatantly political backgrounds of certain members.

For example, one of the members works for an organization that describes itself as “an investment advisor focused exclusively on capturing this market opportunity through investments in low-carbon and sustainable real assets,” while another, according to Politico, is working with other groups to prepare a list of climate-minded candidates for financial regulator roles in a potential Biden administration.

A final problem involves establishing yet another platform that may simply become an arena for political grandstanding, which is illustrated by the report’s hyperventilated claim that everyone is “impatiently waiting for the appropriate incentives and other policies to reduce emissions to be instituted through legislation” to enable the financial system to address this “existential threat.”

Why Do We Need a Financial Regulator Involved?

Given the expertise that already resides in the scientific community on climate change, an obvious question arises as to why we need the addition of a financial regulator with no obvious expertise or experience in this area.

Moreover, given the incentives and ability of market participants to utilize existing markets to hedge or profit from climate risks, it does not seem credible to argue, as the task force’s chairman does, that “financial markets cannot… [price climate risk] on their own.”

On the contrary, commercial firms such as insurers, who have a lot to lose if apocalypse occurs, would seem to have sufficient self-interest to prepare for the future without the CFTC or one of its advisory committees telling them to “undertake climate risk scenario analysis of their investment portfolios” now.

The danger in all this is that the CFTC will end up pushing a political agenda while at the same time detracting from its ability to accomplish its core mission.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Robert Zwirb is an attorney who has advised market participants on financial regulatory issues. He has served as counsel to a Wall Street law firm, as well as to two former chairs of the Commodity Futures Trading Commission, Wendy Gramm and Sharon Brown-Hruska. He also served as assistant general counsel principally engaged in appellate litigation for the agency.