A few of the Democrats running for president have started warning about climate change in a way that voters rarely think about yet can profoundly affect their lives. To sum it up: If you think the housing crisis was bad, wait until you see how the climate crisis plays out for financial markets.

The candidates are urging the Federal Reserve—the United States’ central bank—to work with financial institutions around the world to confront climate risks that could trigger cascading collapses.

They also want regulators to ensure that America’s financial system is resilient to the impacts of climate change. 

It’s not just that fossil fuel projects, like other infrastructure investments, are at risk from severe weather events, a risk that lenders and insurance companies must shoulder. It’s also that when the world finally weans itself away from the fossil fuels whose use is driving global warming, the business models of some of the most heavily capitalized world industries could crumble along with demand for their products.

Investors call the problem “stranded assets,” and they’ve been warning about it for years.

The challenge for the candidates is to convert the experts’ somewhat arcane and technical policy recommendations into a stump-speech sound bite or a debate-stage zinger. Candidates haven’t yet been able to put the issue in such simple terms.

When they do, it might go something like this: “If we keep investing in a carbon bubble, the financial disaster that awaits us could make the subprime-mortgage crisis of 10 years ago look like penny-ante poker.”

Washington Gov. Jay Inslee, in a policy statement on June 24, became the latest 2020 candidate to call on the Fed to join the Network for Greening the Financial System (NGFS), a global coalition of 34 central banks and supervisors who are already mobilizing against what they call the systemic financial risk of climate change.

“Without proper incentives and appropriate market structures, corporations could fail to shift their own investments with the scale, speed and awareness which is necessary,” the 30-page document said. “And improperly managed, these climate change damages and the economic shifts they will entail could portend major shocks to financial systems, resulting in economic harm to Americans and others around the globe.”

Sen. Elizabeth Warren has a prescription, first laid out last year in proposed legislation, that calls for publicly owned companies to disclose climate-related risks to their shareholders. This kind of public disclosure of risks to shareholders is featured in the policies of many other candidates, too. The Securities and Exchange Commission, which doesn’t have as broad a mandate as the Fed to regulate the economy, would enforce this kind of standard.

In January, 20 senators—including Warren and fellow 2020 Democratic candidates Cory Booker, Kamala Harris, Amy Klobuchar and Bernie Sanders—wrote to the Federal Reserve Chairman Jerome Powell saying, “U.S. regulators must join their international peers in ensuring the financial system is resilient to climate-related risks.”

When the housing crisis hit “in 2008, the idea that everything is fine and we have a nicely-regulated financial system that’s not subject to radical change got blown to bits,” said Eric Orts, a University of Pennsylvania business professor. “If you think we can do nothing about climate change, and let all these floods and hurricanes and wildfires get worse without having an economic disaster, then you’re not looking reality in the face.”

Fed Chair Powell’s Views on Climate Risk

As a concept, systemic risk to financial institutions from climate change may be too technical to resonate in the breathless, thrust-and-parry swirl of U.S. politics, Orts said.

But central bankers have to acknowledge the threat because they’re legally required to promote the stability of the banks and other financial institutions that they help regulate.

The U.S. Fed hasn’t been as assertive as some other central banks when it comes to climate change. Writing back to the senators who questioned its stance, Powell said the Fed’s main concern was immediate repercussions from individual severe weather events, such as when Hurricane Sandy smacked Manhattan, and the New York Fed had to make sure to keep cash flowing in the world’s financial capital.

When Powell testified before the Senate last Thursday, he told Sen. Brian Schatz of Hawaii, one of the letter’s authors, that he disagrees with a recent Bank of England recommendation that climate risks be incorporated into the day-to-day supervision of banks. “I see climate change as a longer-run issue. I don’t know that integrating it into the day-to-day financial supervision of financial institutions would add much value,” Powell said. “We have lots of things to supervise them for.”

But in a recent letter, the San Francisco Federal Reserve Bank cited climate change along with an aging population and new technologies as one of the three main forces reshaping the economy, and explored how it should affect Fed governance.

It warned that climate risk “could threaten the stability of the financial system as a whole,” and even spark “in the extreme, a financial crisis.”

Still, it cautioned that “while the effects and risks of climate change are relevant factors for the Fed to consider, the Fed is not in a position to use monetary policy actively to foster a transition to a low-carbon economy.”

Avoiding ‘Sudden Collapse’ of Asset Prices

The NGFS, whose members regulate two-thirds of the world’s important banks and insurers but do not include the U.S. Fed, was cautious, too, when it urged its member central banks in April to collect better data for measuring systemic risk and to advance sustainability within their own vast portfolios.

Such measures “will help avoid a climate-driven ‘Minsky moment,’ — the term we use to refer to a sudden collapse of asset prices,” NGFS leaders said. (Hyman Minsky was an American economist who studied financial panics; he died in 1996.)

“It’s a lot harder to dismiss the idea of systemic risk as ‘some scientist trying to make a buck’ when it’s central bankers who are saying it,” said Jamie Bonham, manager of corporate engagement at NEI Investments, a Toronto firm which manages $7.6 billion for investors. “They’re as conservative a group as you can get, so I do hope this issue will start to influence the electoral side of things.’’

Mark Carney, the governor of the Bank of England, helped launched the NGFS last year. In 2015, in what’s remembered as an iconic speech, he bemoaned the difficulty of fighting climate change by pointing to what he called ‘the tragedy of the horizon,’ namely, that people alive today have no direct incentive to relieve a burden that will be borne mostly by future generations.

Carney also began prodding individual companies to disclose climate risk lurking on their balance sheets. Such reports now flow in a steady torrent of anxiety:

• On April 4, BlackRock, the world’s largest manager of financial assets, said extreme weather poses a growing risk not just to the $3.8 trillion U.S. municipal bond market, but also to the value of commercial real estate and electric utilities. “Conclusion: the risks are underpriced,” BlackRock said.
   
• On June 6, the Cleveland-based Institute for Energy Economics and Financial Analysis reported that General Electric Co. lost 74 percent of its market value in the three years to 2018 partly by failing to foresee how quickly customers would turn away from gas and thermal coal turbines in favor of cleaner energy. Prior to the slump, GE was the world’s most valuable company.
   
• On June 12, Commissioner Rostin Behnam urged the U.S. Commodity Futures Trading Commission to undertake a comprehensive review of climate risk in the grain, oil and futures markets that it regulates. “Our commodity markets and the financial markets that support them will suffer if we do not take action to mitigate the risk of contagion,” Behnam said.
   
• On June 20, Boulder, Colorado-based Resilient Analytics reported the U.S. needs to spend at least $400 billion by 2040 to protect coastal communities from rising sea levels. This equals the cost of the U.S. interstate highway system. 

“Last year, about $500 billion moved toward investments in alternative energy, but we need this to be $1.5 trillion a year to get anywhere near the objectives of the Paris agreement,” said Erika Karp, chief executive of New York-based Cornerstone Capital Group.

James Thurber, a presidential historian at American University, said the current climate denial in the Oval Office will only postpone the day of reckoning with climate change.

“Can our institutions deal with a problem like this when we’re highly polarized and getting more polarized?” he asked. “That’s the challenge for our democracy, and I worry about it every day.”