Press Release: Curbing Carbon Investment with Dodd-Frank Regulations

New report explores how Dodd-Frank regulations can minimize Wall Street’s investment in climate change  

Climate change threatens our financial stability. Some experts predict that global economic losses could reach $23 trillion—three or four times the scale of the 2008 financial crisis. Despite these warnings, US-based financial institutions continue to increase their investments in dirty energy.

Recognizing that policy is needed to address Wall Street’s role in the climate crisis, the Great Democracy Initiative released A Regulatory Green Light: How Dodd-Frank Can Address Wall Street’s Role in the Climate Crisis. As the report shows, the Dodd-Frank Act of 2010 provides regulators with the tools to require financial institutions to internalize the financial risks associated with investments in carbon-intensive industries and assets vulnerable to climate change. Authored by Graham Steele, director of the corporations and society initiative at Stanford Graduate School of Business, the paper demonstrates that existing regulatory tools could allow immediate and meaningful action without further legislation from Congress. 

“Dodd-Frank established new mechanisms for federal regulators to tackle risks that threaten the entire financial system, many of which can be deployed to mitigate the financial risks of climate change. Financial regulators should use them to force large financial institutions to internalize the costs of the climate and financial risks that they create, through rigorous stress tests, increased capital requirements, and margin requirements for capital markets trading,” said Steele. 

The report proposes several ways of regulating the financial sector’s role in climate change, focusing on the tools and authorities already available to regulators and avoiding the need to rely on legislative bodies that are subject to the outsized political influence of fossil fuel companies. Such measures include:

  • Capital requirements: Raise the risk weights (thus requiring more capital) for investments in climate change-driving assets, as well as credit exposures to sectors that are vulnerable to the effects of climate change.
  • Stress testing: Incorporate a series of scenarios involving climate shocks and transition pathways into agency-run supervisory stress tests. 
  • Margin: Impose stringent margin requirements on transactions that involve securities and derivatives tied to, at a minimum, the big 100 corporate emitters, deforestation-related agribusinesses, fossil fuels, and other climate-damaging commodities.

“Unless climate risks are properly priced through macroprudential regulation, Wall Street will continue to finance the climate crisis at the expense of the public. Ultimately, policymakers must deploy a number of strategies to decommission the fossil fuel industry and scale up the green energy sector to the point that it can be the exclusive source that powers our economy,” said Steele. 

To learn more about how the Great Democracy Initiative is protecting our democracy from global threats, click here

About the Great Democracy InitiativeThe Great Democracy Initiative seeks to develop bold, progressive, and actionable policy plans for leaders seeking solutions to key issues facing our country. Instead of proposing technocratic tweaks or layering new programs on top of a broken system, the Great Democracy Initiative targets the structural problems facing our democracy, including unaccountable policymakers, corporations with outsized economic and political power, and policies that subtly stack the deck against average Americans.