[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
CREATING A CLIMATE RESILIENT AMERICA:
STRENGTHENING THE U.S. FINANCIAL SYSTEM
AND EXPANDING ECONOMIC OPPORTUNITY
=======================================================================
HEARING
BEFORE THE
SELECT COMMITTEE ON THE
CLIMATE CRISIS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
OCTOBER 1, 2020
__________
Serial No. 116-19
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
Printed for the use of the Select Committee on the Climate Crisis
______
U.S. GOVERNMENT PUBLISHING OFFICE
42-185 WASHINGTON : 2020
SELECT COMMITTEE ON THE CLIMATE CRISIS
One Hundred Sixteenth Congress
KATHY CASTOR, Florida, Chair
BEN RAY LUJAN, New Mexico GARRET GRAVES, Louisiana,
SUZANNE BONAMICI, Oregon Ranking Member
JULIA BROWNLEY, Calfornia MORGAN GRIFFITH, Virginia
JARED HUFFMAN, California GARY PALMER, Alabama
A. DONALD McEACHIN, Virginia BUDDY CARTER, Georgia
MIKE LEVIN, California CAROL MILLER, West Virginia
SEAN CASTEN, Illinois KELLY ARMSTRONG, North Dakota
JOE NEGUSE, Colorado
----------
Ana Unruh Cohen, Majority Staff Director
Marty Hall, Minority Staff Director
climatecrisis.house.gov
C O N T E N T S
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STATEMENTS OF MEMBERS OF CONGRESS
Page
Hon. Kathy Castor, a Representative in Congress from the State of
Florida, and Chair, Select Committee on the Climate Crisis:
Opening Statement............................................ 1
Prepared Statement........................................... 3
Hon. Garret Graves, a Representative in Congress from the State
of Louisiana, and Ranking Member, Select Committee on the
Climate Crisis:
Opening Statement............................................ 4
WITNESS: PANEL 1
Hon. Rostin Behnam, Commissioner, Commodity Futures Trading
Commission
Oral Statement............................................... 5
Prepared Statement........................................... 8
WITNESSES: PANEL 2
Joanna Syroka, Senior Underwriter and Director of New Markets,
Fermat Capital Management, LLC
Oral Statement............................................... 30
Prepared Statement........................................... 32
Rich Powell, Executive Director, ClearPath
Oral Statement............................................... 35
Prepared Statement........................................... 36
Maggie Monast, Director of Working Lands, Environmental Defense
Fund
Oral Statement............................................... 42
Prepared Statement........................................... 44
APPENDIX
Questions for the Record from Hon. Kathy Castor to Hon. Rostin
Behnam......................................................... 64
Questions for the Record from Hon. Kathy Castor to Joanna Syroka. 66
Questions for the Record from Hon. Kathy Castor to Maggie Monast. 69
CREATING A CLIMATE RESILIENT AMERICA:
STRENGTHENING THE U.S. FINANCIAL SYSTEM
AND EXPANDING ECONOMIC OPPORTUNITY
----------
THURSDAY, OCTOBER 1, 2020
House of Representatives,
Select Committee on the Climate Crisis,
Washington, DC.
The committee met, pursuant to call, at 1:31 p.m., via
Webex, Hon. Kathy Castor [chairwoman of the committee]
presiding.
Present: Representatives Castor, Bonamici, Brownley,
Huffman, Levin, Casten, Graves, Palmer, Carter, and Miller.
Ms. Castor. The committee will come to order.
Without objection, the chair is authorized to declare a
recess of the committee at any time.
Good afternoon, and thank you all for joining this remote
hearing.
As a reminder, members participating in a hearing remotely
should be visible on the camera throughout the hearing.
As with in-person meetings, members are responsible for
controlling their own microphones. Members can be muted by
staff only to avoid inadvertent background noises.
In addition, statements, documents, or motions must be
submitted to the electronic repository at
[email protected].
Finally, members and witnesses experiencing technical
problems should inform committee staff immediately if that
happens.
I now recognize myself for 5 minutes for an opening
statement.
Well, whether it is extreme heat, intense flooding,
stronger storms, or relentless wildfires, the climate crisis
continues to pose a severe threat to America's economy and the
pocketbooks of all Americans.
Year after year, we have seen how climate change hurts
businesses, it strains resources across the nation, and it
harms workers. And we have seen the impact it has on budgets of
local governments, who don't always have the resources to
recover from worsening disasters, and on the budget of the U.S.
government, as we are forced to provide greater amounts of
disaster aid in the wake of calamity.
The risks and harm of climate change are hurting families,
farmers, small business owners, as well as workers in
manufacturing and the energy sector. The changing climate is
especially harming working-class households and people of
color, the same folks who have been historically marginalized
through discriminatory practices and underinvestment.
It is also putting financial institutions at risk. Just
last month, the Commodity Futures Trading Commission issued a
landmark report describing these risks and giving lawmakers and
financial regulators actionable recommendations on how to
mitigate the growing risks.
Climate change is affecting insurance markets, and it is
making lending costlier. It is making it harder for frontline
communities to afford the protection and peace of mind that
they deserve. And it is hurting farmers and agricultural
workers.
The writing is on the wall. Financial markets, federal
regulators, and business leaders recognize the risks posed by
climate change, but they are also publicly optimistic about the
opportunities to solve the climate crisis, by directing capital
towards climate-smart investments and making our economy more
resilient and stronger than ever.
Just today, 55 international financial institutions,
including U.S.-based MetLife and Amalgamated Bank, released a
framework for setting specific climate goals for mortgages,
bonds, and other asset classes in their portfolios.
Our workers, our financial institutions, and our small
businesses are looking to Congress now for solutions. So, as we
find ways to bounce back from the harm done by COVID-19, we
must build back our economy so that it is better and stronger
than ever. And it starts by investing in long-term solutions--
lasting solutions that will protect workers, strengthen our
financial systems, and ensure economic growth.
These solutions are climate solutions. Investing in a
resilient clean energy economy will put Americans back to work
through millions of good-paying, life-sustaining jobs. It will
strengthen the middle class and provide justice for Black and
Brown Americans. And it will make our financial institutions
stronger and more resilient.
By bringing transparency to climate-related risks, we will
be able to build a 21st-century economy that withstands the
test of time. Climate solutions give us a chance to rebuild our
economy and our infrastructure, making them stronger, more
resilient, more grounded in environmental justice. We can
create the jobs of the future, at a time when our nation
desperately needs them. But we have to act with urgency, and we
have to follow the science.
States and local communities are already leading the way.
For example, California has created a special task force on
climate risk and insurance, while cities in my own state of
Florida have formed regional climate compacts to pool resources
and knowledge. And, along the Mississippi River, communities
have come together to address flood and drought risks that
threaten farmers. They are finding innovative solutions in
collaboration with insurers, catastrophe risk modelers, and
investors.
So now Congress must step up. We must enact policies that
give communities the tools and resources they need. We must
ensure their access to climate data so that they can make
informed decisions. We must help them overcome barriers to
private investment in climate resilience and protect investors
from hidden sources of climate risks.
The science is in, the risks are clear, and the incredible
opportunities for progress are within our reach. It is up to us
what to do next.
I yield back.
And now I recognize Ranking Member Graves for a 5-minute
opening statement.
[The statement of Ms. Castor follows:]
Opening Statement of Chair Kathy Castor
Hearing on ``Creating a Climate Resilient America: Strengthening the
U.S. Financial System and Expanding Economic Opportunity''
Select Committee on the Climate Crisis
October 1st, 2020
As prepared for delivery
Whether it's extreme heat, intense flooding, stronger storms, or
relentless wildfires, the climate crisis continues to pose a severe
threat to America's economy and the pocketbooks of all Americans. Year
after year, we've seen how climate change hurts businesses, strains
resources across the nation, and harms workers. And we've seen the
impact it has on the budgets of local governments, who don't always
have the resources to recover from worsening disasters--and on the
budget of the U.S. government, as we are forced to provide greater
amounts of disaster aid in the wake of calamity.
The risks and harms of climate change are hurting families,
farmers, and small business owners, as well as workers in manufacturing
and the energy sector. The changing climate is especially harming
working-class households and people of color--the same folks who have
been historically marginalized through discriminatory practices and
underinvestment.
It's also putting our financial institutions at risk. Just last
month, the Commodity Futures Trading Commission issued a landmark
report, describing these dangers and giving lawmakers and financial
regulators actionable recommendations on how to mitigate the growing
risks. Climate change is affecting insurance markets and making lending
costlier. It's making it harder for frontline communities to afford the
protection and peace of mind they deserve. And it's hurting our farmers
and agricultural workers.
The writing is on the wall. Financial markets, federal regulators,
and business leaders recognize the risks posed by climate change, but
they're also publicly optimistic about the opportunities to solve the
climate crisis--by directing capital toward climate-smart investments
and making our economy more resilient and stronger than ever. Just
today, 55 international financial intuitions, including U.S.-based
MetLife and the Amalgamated Bank, released a framework for setting
specific climate goals for mortgages, bonds and other asset classes in
their portfolios.
Our workers, our financial institutions, and our small businesses
are looking to Congress for solutions. So, as we find ways to bounce
back from the harm done by COVID-19, we must build back our economy so
that it's better and stronger than ever. And it starts by investing in
long-term solutions--lasting solutions that will protect workers,
strengthen our financial systems, and ensure economic growth.
Those solutions are climate solutions. Investing in a resilient
clean energy economy will put Americans back to work through millions
of good-paying, life-sustaining jobs. It will strengthen our middle
class and provide justice for Black and Brown Americans. And it will
make our financial institutions stronger and more resilient to growing
climate impacts.
By bringing transparency to climate-related risks, we'll be able to
build a 21st-century economy that withstands the test of time. Climate
solutions give us a chance to rebuild our economy and our
infrastructure, making them stronger, more resilient, and more grounded
in environmental justice. We can create the jobs of the future at a
time when our nation desperately needs them--but we need to act with
urgency and unite behind the science.
States and local communities are already leading the way. For
example, California has created a special task force on climate risk
and insurance, while cities in my own state of Florida have formed
regional climate compacts to pool together resources and knowledge. And
along the Mississippi River, communities have come together to address
flood and drought risks that threaten farmers, finding innovative
solutions in collaboration with insurers, catastrophe risk modelers,
and investors.
Now Congress must step up and lead.
We must enact policies that give communities the tools and
resources they need to become resilient and mitigate climate risks. We
must ensure their access to climate data, so they can make informed
decisions about how to sustain their local economies and build lasting
growth. And we must help them overcome barriers to private investment
in climate resilience and protect investors from hidden sources of
climate risks.
The science is in. The risks are clear. And the incredible
opportunities for progress are within our reach. It's up to us what to
do next.
Mr. Graves. Okay. Thank you, Madam Chair. Thank you for
hosting this hearing today, and I want to thank the
Commissioner for joining us.
Madam Chair, you mentioned a report that the Commission
recently released, and there are a number of things in there
that I think are important issues that the Commission has
raised in regard to risk and risk assessment and mitigation.
I also wonder about looking at risk holistically and
whether or not the report should actually be even more
encompassing.
And I will give some examples. There is no question, as,
Madam Chair, your state and my state well know, of the risk of
sea rise and hurricane intensity and other challenges that our
states have experienced and may experience with greater
frequency in the future. But I think that, as we look at the
future, we also have to think about the volatility, the risk
associated with some of the strategies that are being carried
out to mitigate the very threat that we are discussing today.
And, Madam Chair, you talked about the State of California.
Seeing things like blackouts and brownouts in a state, that is
extraordinary risk. How do you have a business, how do you take
care of your family, how can you even live there--as I
understand, we have seen a net departure of families from
California--if you are having rolling blackouts and brownouts?
How can we provide business certainty and encourage folks
to create new small businesses if we are having double the
electricity cost in California than they do, for example, in my
home state of Louisiana?
How can we provide certainty for our businesses and for our
families that are trying to keep their homes heated and cooled
if, not just the blackouts and brownouts, but if we are
subjecting ourselves to the volatility of energy sources or
energy technology from China, where we recently saw during the
coronavirus pandemic how they were using PPE effectively as
warfare against the United States and other countries around
the world?
Thankfully, just today, the President has issued an
executive order related to critical minerals. And, as we move
in this direction of a cleaner energy portfolio and cleaner
energy resources, something that all of us share, that we don't
play into the hands of China by subjecting ourselves to
dependence upon them, where they are able to continue just
pulling these strings and causing problems and volatility in
the United States.
I think, also, the report scope--how do you actually
address certainty, or how do you provide certainty, when the
reality is that--well, the United States has been the world
leader in reducing emissions. For every 1 ton of emissions we
have reduced, China has increased by 4. Therefore, we don't
actually even have control over our own destiny, our own
future, if we are going to have irresponsible parties, like
China, trying to pretend as though they are a developing
nation, yet spending trillions of dollars on their defense and
on their investments around the globe, adversely affecting the
United States, our European allies, our Pacific allies, and
others. There is all sorts of uncertainty that I think poses an
even greater threat or a greater risk to the United States than
the limited scope that the Commission has looked at.
And I want to say, look, I agree with many of the things
the Commission has identified, but I believe we need to look
even broader and focus on the things that we truly have control
over.
Madam Chair, one of those is something you and I share, of
course, and that is the resiliency investments. And if we are
going to move forward on resiliency, if we are going to move
forward in deploying renewable energy projects, we have to look
at our regulatory structure that is currently impeding those
very projects for resiliency. We have to look at the regulatory
structure that is impeding our efforts to try to build new
renewable wind projects and solar arrays and other things,
again, that I think we all share.
So I think we need to look more broad. I am glad we are
having this hearing today, and I look forward to hearing from
the two panels of witnesses.
Ms. Castor. Thank you very much.
Without objection, members who wish to enter opening
statements into the record may have 5 business days to do so.
Now I would like to welcome our witnesses.
We will hear from a range of experts on recent findings and
emerging opportunities to address climate threats to financial
systems and the Nation's economic vitality.
We will have two panels. On the first panel, we will hear
from Rostin Behnam, a Commissioner for the Commodity Futures
Trading Commission, where he has served since September of
2017.
As sponsor of the CFTC's Market Risk Advisory Committee,
Commissioner Behnam convenes leading market experts and public
consumer groups to discuss the timeliest issues to evolving
market structures and movement of risk across clearinghouses,
exchanges, intermediaries, market makers, and end users.
Commissioner Behnam convened the Climate-Related Market
Risk Subcommittee to provide a report to the MRAC on climate-
related financial and market risks.
Without objection, the witness's written statement will be
made part of the record.
With that, Commissioner Behnam, welcome. You are now
recognized to give a 5-minute presentation of your testimony.
STATEMENT OF THE HONORABLE ROSTIN BEHNAM, COMMISSIONER,
COMMODITY FUTURES TRADING COMMISSION
Mr. Behnam. Thank you, Chair.
Chair Castor, Ranking Member Graves, and members of the
committee, it is an honor to appear before you today to discuss
creating a climate resilient America.
Before I begin, please recognize that the views I express
today are my own and do not represent the views of the CFTC,
its staff, or my fellow Commissioners.
The critical work of this committee could not be timelier.
As of Tuesday, wildfire activity continued in 10 Western
States, and the Gulf Coast is still reeling from the damage of
Hurricanes Laura and Sally. The impact of wildfires on air
quality have led to the use of the word ``airpocalypse'' to
describe high particulate pollution in parts of the United
States.
These are all manifestations of the physical risks
associated with climate change and extreme weather events. But
how is an airpocalypse or climate risk generally accounted for
in the financial markets, and why is a financial regulator in
the right position to move this conversation forward?
I serve as a Commissioner of the Commodity Futures Trading
Commission, the primary U.S. derivatives markets regulator.
Derivatives are critical risk management and price discovery
tools that touch nearly every corner of our economy, from the
price of bread to the price at the pump.
With a previous background in financial services policy and
agricultural policy, the multitude of risks related to climate
change faced by farmers, ranchers, and the entire value chain
has been at the forefront of my thinking.
At the CFTC, when we think about financial market risk, we
think about scenarios that are extreme but plausible. What if
there were years in which wildfires impaired the economy of the
Western States, record flooding in the Midwest shocked the
agricultural engine of the country, and Gulf Coast and East
Coast hurricanes destroyed coastal property? And what if these
events happened in quick succession or at the same time? Beyond
the implications for our lives, health, and national security,
would our economy and the financial markets be able to
withstand the shock?
The CFTC has active and insightful federal advisory
committees which provide outside input and make recommendations
to the Commission. In June of 2019, the Market Risk Advisory
Committee, which I sponsor, held a public meeting on the
relationship between climate change and financial market risk.
I left that informative day with three fears confirmed: Climate
risk manifests in the financial markets, the U.S. financial
regulators were behind their global counterparts, and much more
work needed to be done.
To more fully focus on this issue, I immediately began the
process of forming the Climate-Related Market Risk
Subcommittee. I am grateful to each of the 34 subcommittee
members--professionals from multiple sectors of the economy and
financial markets--for their commitment to the effort and their
willingness to tackle a difficult issue during an unprecedented
time.
I could not have been more fortunate with Dr. Bob Litterman
as the subcommittee's chair, an economist with expertise in
finance and risk management, who has more recently focused his
endeavors on climate change.
When I asked for a consensus document, I knew that was a
high bar. But I was very pleased when, earlier last month, the
subcommittee voted unanimously, 34 to 0, to approve the report.
I would also like to take a moment to recognize my chief of
staff, David Gillers, who has shepherded this initiative, and
thank John Dunfee, Laura Gardy, and Alicia Lewis.
``Managing Climate Risk in the U.S. Financial System'' is a
first-of-its-kind document. A few of the critical findings of
the report: climate change poses a major risk to the stability
of the U.S. financial system and to its ability to sustain the
American economy; U.S. financial regulators should move
urgently and decisively to measure, understand, and address the
risk; and the financial system can be a catalyst for investment
that accelerates economic resilience and the transition to a
net-zero emissions economy.
The report provides 53 policy recommendations, establishing
at the outset that policies should be flexible, open-ended, and
adaptable in real time, based on close and iterative dialogue
with the private sector.
Second, the report recognizes that climate change already
has placed disproportionate burdens on low- and moderate-income
households and historically marginalized communities. It is
critical that any policy does not make this problem worse.
The first recommendation of the report is also the one that
requires congressional action. The U.S. should establish a
price on carbon. The report highlights that this is the single
most important step to manage climate risk and drive
appropriate allocation of capital.
As Dr. Litterman has pointed out on several occasions,
financial markets do an amazing job of allocating capital in
the direction of the incentives that they are given. When
incentives are appropriate, they lead to innovation,
improvements in health and safety, and quality of life.
In the absence of a price on carbon, there is still an
urgent role for regulators. The report points out that
financial regulators should actively promote, and in some
cases, require better understanding, quantification,
disclosure, and management of climate-related risk by financial
institutions and other participants. The report argues for
critical action regarding disclosures, stress testing, scenario
analysis, and governance.
Another few recommendations of the report is international
collaboration and harmonization. When it comes to pricing
carbon, disclosures, stress testing, and scenario analysis, it
is critical that we approach this together with our
international partners.
Perhaps my favorite chapter is the last, which focuses on
opportunities in financing the net-zero transition. The report
makes the case that structural changes and market innovations
can expand capital flows to sustainable finance solutions,
creating significant employment opportunities.
I will end my remarks with the observation from the report
that captures the seriousness and urgency at hand: a world
wracked by frequent and devastating shocks from climate change
cannot sustain the fundamental conditions supporting our
financial system.
The good news, though, is that we have virtually all of the
tools that we need to start our work. With the exception of a
price on carbon, existing legislation already provides U.S.
financial regulators with wide-ranging and flexible authorities
that could be used to start addressing financial climate-
related risk now.
I strongly believe that all congressional committees with
relevant oversight jurisdiction should consider the policy
recommendation.
As one observer has noted, ``We missed the subprime
mortgage crisis, which led to the Great Recession. We missed
the COVID-19 crisis, which has led to catastrophic loss of
human life and economic shock. Let us not miss the climate
crisis.''
Thank you for your time, and I am happy and look forward to
answering your questions.
[The statement of Mr. Behnam follows:]
Prepared Statement of Rostin Behnam
Commissioner, Commodity Futures Trading Commission
Before the House Select Committee on the Climate Crisis
``Creating a Climate Resilient America: Strengthening the U.S.
Financial System and Expanding Economic Opportunity''
Thursday October 1, 2020 1:30 p.m.
Chair Castor, Ranking Member Graves, and members of the committee,
it is an honor to appear before you today to discuss creating a climate
resilient America through strengthening the U.S. financial system and
expanding economic opportunity. Before I begin, please recognize that
the views I express today are my own and do not represent the views of
the CFTC, its staff, or my fellow Commissioners.
The critical work of this committee and the topic of today's
hearing could not be timelier. As of Tuesday, wildfire activity
continued in 10 western states where 70 large fires have burned more
than 3.9 million acres,\1\ and the Gulf Coast is still reeling from the
damage of Hurricanes Laura and Sally. Data from NASA satellites
confirms that 2020 fire activity in California, Oregon, and Washington
State has broken several records in both size and scope.\2\ In
particular, a review of the data collected since 1997 indicates that
2020 is the highest year of fire carbon emissions for California, and,
notably, this figure only reflects activity through September 11th.\3\
---------------------------------------------------------------------------
\1\ Fire Information, National Interagency Fire Center, https://
www.nifc.gov/fireInfo/nfn.htm (last visited Sept. 29, 2020).
\2\ Historic Fires Devastate the U.S. Pacific Coast, NASA Earth
Observatory, https://earthobservatory.nasa.gov/images/147277/historic-
fires-devastate-the-us-pacific-coast (last visited Sept. 29, 2020).
\3\ Id.
---------------------------------------------------------------------------
The impact of wildfires on air quality has led to the use of the
word ``airpocalypse'' to describe the dangerously high particulate
pollution in parts of the United States, a term that in the past has
only applied to other countries.\4\ The impact of airpocalyptic
conditions on human health and welfare is indisputable. Even as this
country continues to battle COVID-19 with its own litany of impacts on
respiratory function, Oregon hospitals recently reported a 10% increase
in emergency room visits for breathing problems related to air
quality.\5\
---------------------------------------------------------------------------
\4\ Blacki Migliozzi, Scott Reinhard, Nadja Popovich, Tim Wallace,
and Allison McCann, Record Wildfires on the West Coast are Capping a
Disastrous Decade, N.Y. Times (Sept. 24, 2020), https://
www.nytimes.com/interactive/2020/09/24/climate/fires-worst-year-
california-oregon-wash ington.html.
\5\ Id.
---------------------------------------------------------------------------
These are all manifestations of the physical risks associated with
changing climate and extreme weather events. But how is an
``airpocalypse,'' or climate risk generally, understood and accounted
for in the financial markets? And, why is a financial regulator in the
right position to move this conversation forward? Before I answer these
questions, I'd like to provide a bit of background.
Background and Beginnings
I serve as a Commissioner at the Commodity Futures Trading
Commission, or the CFTC. The CFTC is a bipartisan, five-member
independent federal regulatory agency that serves as the primary U.S.
derivatives market regulator. Derivatives, which include futures,
options, and swaps, are financial contracts that derive their value
from an underlying asset, ranging from a variety of commodities
including wheat, natural gas, gold, interest rates, and bitcoin.
Derivatives are critical risk management and price discovery tools that
touch nearly every corner of our economy, from the price of bread to
gas at the pump.
The CFTC's mission is to foster open, transparent, competitive and
financially sound markets; prevent and deter price manipulation and
other disruptions to market integrity; and to protect all market
participants and the public from fraud, manipulation, and abusive
practices.\6\ When the CFTC was established as an independent agency in
1974, most futures trading took place in the agricultural sector.\7\
Today, the portfolio of derivatives is much more diverse, with the vast
majority of the contracts being financial in nature, including global
currencies, interest rates, and financial indices. Like the contracts
themselves, the market participants also vary, including banks,
institutional investors, manufacturers, farmers and ranchers, and
energy companies.
---------------------------------------------------------------------------
\6\ See Section 3 of the Commodity Exchange Act, 7 U.S.C. 5.
\7\ About the Commission, Commodity Futures Trading Commission,
https://www.cftc.gov/About/AboutTheCommission (last visited Sept. 29,
2020).
---------------------------------------------------------------------------
With a previous background as a congressional aide focused on both
financial services policy and agricultural policy, including the 2014
Farm Bill,\8\ the multitude of risks related to climate change faced by
farmers, ranchers, and the entire value chain has been at the forefront
of my thinking since joining the Commission in 2017. Weather and
climate present the greatest, consistent--yet uncertain-- risks to the
agricultural economy and rural communities. More frequent and more
severe extreme weather events, from flooding, hurricanes, and
tornadoes, to wildfires have presented a growing set of longer term
challenges that require a different way of assessing long-term risk
management and the policies to support it.
---------------------------------------------------------------------------
\8\ Agricultural Act of 2014, Pub. L. No. 113-79, 128 Stat. 649
(2014).
---------------------------------------------------------------------------
At the CFTC, when we think about financial market risk we are
required to think about scenarios that are ``extreme but plausible.''
What if there were years in which wildfires impaired the economy of the
Western states, record flooding in the Midwest shocked the agricultural
engine of the country, and Gulf Coast and East Coast Hurricanes
destroyed coastal property? And what if these events happened in quick
succession, or, even worse, but still plausible, and this is key, what
if they happened at the same time? Beyond the implications for our
lives, health, safety, and national security, would our economy and the
financial markets that underpin it be able to withstand such withering
and debilitating shock? And, more to the point, what could or should
policy makers do about it?
Like many other agencies and departments, the CFTC has active and
insightful Federal Advisory Committees, authorized under the Federal
Advisory Committee Act,\9\ which provide outside input and make
recommendations to the Commission on regulatory and market issues. Our
advisory committees are comprised of industry participants, subject
matter experts, and stakeholders in the markets we oversee. I have
proudly served as the sponsor of the Market Risk Advisory Committee
(MRAC) since I arrived at the Commission. During my tenure, the MRAC
has convened to address a variety of matters, including the impending
transition away from the London Interbank Offered Rate, more commonly
known as Libor, market structure issues, and clearinghouse risk issues.
---------------------------------------------------------------------------
\9\ Federal Advisory Committee Act (``FACA''), as amended, 5 U.S.C.
App. 2.
---------------------------------------------------------------------------
The MRAC advises the Commission on matters relating to evolving
market structures and movement of risk across the derivatives markets.
It examines systemic issues that threaten the stability of the
derivatives and other financial markets. The MRAC is therefore
perfectly situated to explore the links between climate change and
financial market risk, and what role policy makers should and could
play to mitigate these more extreme, emerging risks, specifically with
respect to financial market participants.
In June of 2019, the MRAC held a public meeting on the relationship
between climate change and financial market risk.\10\ I left that
informative day with three fears confirmed: (1) climate risk manifests
in the financial markets in multiple and sometimes amplifying ways; (2)
the U.S. financial regulators were far behind their global
counterparts; and (3) much more work needed to be done to examine the
potential risks that might demand a policy response. It turns out that
central banks and financial regulators across the world have been
working on this issue for years, but in the U.S. we are only at the
very nascent stages. I'd like to recognize the leading work of the Bank
of England in this space, and a number of excellent papers they have
authored on this topic.\11\ Additionally, the Bank for International
Settlements, the Network for Greening the Financial System, and the
Financial Stability Board's Task Force on Climate-related Financial
Disclosures have also done superb work in this space.\12\
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\10\ Information on all of the MRAC meetings, including press
releases, archived webcasts, and presentation materials are available
at https://www.cftc.gov/About/CFTCCommittees/
MarketRiskAdvisoryCommittee/mrac_meetings.html.
\11\ Climate Change, Bank of England, https://
www.bankofengland.co.uk/climate-change (last visited Sept. 29, 2020).
\12\ See Patrick Bolton, Morgan Despres, Luis Awazu Pereira da
Silva, Frederic Samama, and Romain Svartzman, The Green Swan: Central
Banking and Financial Stability in the Age of Climate Change, Bank for
International Settlements (Jan. 2020), https://www.bis.org/publ/
othp31.pdf; Origin and Purpose, Network for Greening Fin. Sys., https:/
/www.ngfs.net/en/about-us/governance/origin-and-purpose (last visited
Sept. 29, 2020); The Task Force on Climate-related Financial
Disclosures, https://www.fsb-tcfd.org/ (last visited Sept. 29, 2020).
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To more fully focus on the issues and ensure we were able to gather
the right mix of stakeholders, I immediately began the process of
forming the Climate-Related Market Risk Subcommittee of the MRAC. After
unanimously confirming its formation and charge, and soliciting the
public for membership nominations,\13\ the CFTC unanimously confirmed
its membership in November, 2019.\14\ I charged the Subcommittee with
exploring the relationship between climate risk and financial market
risk, and asked that it produce a report with findings and
recommendations to address the risk.
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\13\ See Press Release Number 7963-19, CFTC Commissioner Behnam
Announces the Establishment of the Market Risk Advisory Committee's
Climate Related Market Risk Subcommittee and Seeks Nominations for
Membership (July 10, 2019), https://www.cftc.gov/PressRoom/
PressReleases/7963-19.
\14\ See Press Release Number 8079-19, CFTC, CFTC Commissioner
Rostin Behnam Announces Members of the Market Risk Advisory Committee's
New Climate-Related Market Risk Subcommittee (Nov. 14, 2019), https://
www.cftc.gov/PressRoom/PressReleases/8079-19.
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The Subcommittee membership includes 34 professionals from banking,
asset management, insurance, a credit rating company, agricultural and
energy markets, data providers, environmental groups, and academia,
singularly focused on climate change, adaptation, public policy, and
finance. Identifying a chairperson of the Subcommittee was a critical
step, and I could not have been more fortunate with Dr. Bob Litterman's
willingness to serve as the Subcommittee chair.
Dr. Litterman's professional career has spanned more than four
decades and across many disciplines, including economics, finance, and
risk management. Dr. Litterman spent 23 years at Goldman, Sachs & Co.,
where he served in research, risk management, and investments,
including the head of the firm-wide risk function, and as the co-
developer of the Black-Litterman Global Asset Allocation Model with Dr.
Fischer Black. After leaving Goldman, Bob became a founding partner at
Kepos Capital, a New York City based macro investment firm, shifting
much of his focus to addressing the risks of climate change. Concerned
with the inadequate manner in which society addressed climate risk,
Bob, as an economist and risk manager, has strongly advocated for
appropriate incentives to reduce carbon emissions, through a price on
carbon. This unique mixture of expertise in finance, risk management,
economics, and climate change risk made Bob the perfect candidate to
lead the effort, and we should all be grateful to him for his service.
The Subcommittee represents a diverse and broad coalition of
stakeholders that includes some of the sharpest minds on climate
related financial market risk and also represents a novel,
comprehensive, and inclusive public sector supported effort to study
and address climate risk issues. I am grateful to each of the members
for their commitment to the effort, and their willingness to step up
and tackle a difficult issue during an unprecedented time in our
country's history.
The Subcommittee held two in person meetings beginning 10 months
ago before the COVID-19 pandemic, and then held monthly, then weekly,
and then almost daily telephonic meetings as they conducted their work.
I received updates on their progress throughout the process. When I
asked for a consensus document, I knew that was a high bar to achieve.
However, I was very pleased, when in early September, the Subcommittee
voted unanimously, 34-0, to approve the 165 page report.
In the months preceding the vote, there were many reasons to doubt
the Subcommittee would meet its goal, specifically with the scope and
charge of the Subcommittee. Many outsiders thought arriving at
consensus with members from such diverse parts of the economy and
market was simply not feasible. But, I was optimistic and determined
given the seriousness of the issue and the need for action. More
importantly, as a result of the dedication, skill, and creativity of
each of our members, adept leadership and diplomacy by the Chairman,
the cogent writing of the work stream leads, and the grit,
determination, and wisdom exhibited by our talented editorial team, the
Subcommittee produced what I am very proud to present to you today.\15\
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\15\ Managing Climate Risk in the U.S. Financial System, Report to
the CFTC's Market Risk Advisory Committee by the Climate-Related Market
Risk Subcommittee (Sept. 2020), https://www.cftc.gov/About/
AdvisoryCommittees/MarketRiskAdvisory/MRAC_Reports.html (the
``Report'').
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Before I turn to the report itself, I would like to take a moment
to recognize and thank my Chief of Staff, Mr. David Gillers. David
joined my office in July, 2019, and in many respects has shepherded
this initiative from his very first day at the CFTC. David's commitment
and belief in the Subcommittee's success has been steadfast, and his
comprehensive understanding of the policy issues is a significant part
of why we are here today. I'd also like to recognize and thank John
Dunfee, Laura Gardy, and Alicia Lewis for their tireless work and
support.
The Report
Managing Climate Risk in the U.S. Financial System (the ``Report'')
is a first-of-its kind document. This is the first time an advisory
coalition representing a broad swath of the U.S. economy has come
together under the leadership of the federal government, presented a
consensus view diagnosing climate-related financial market risk, and
outlined a roadmap to directly tackle the problem. Fortunately for us,
the members were not bashful in what they have recommended.
A few of the critical findings of the Report:
1. Climate change poses a major risk to the stability of the U.S.
financial system and to its ability to sustain the American economy.
2. U.S. financial regulators must recognize this, and should move
urgently and decisively to measure, understand, and address this risk.
3. The financial system can be a catalyst for investment that
accelerates economic resilience and the transition to a net-zero
emissions economy.
The Report provides 53 policy recommendations, several of which I
will highlight in a moment. But before I do, I'd like to establish a
few threshold matters that the Report makes clear.
First, the Report establishes at the outset that it calls for
policy and regulatory choices that are ``flexible, open-ended, and
adaptable to new information about climate change and its risks, based
on close and iterative dialogue with the private sector.'' \16\ In
other words, there is much about climate risk that we are still
learning, and policy makers must adapt to new information in real time.
This is by no means an argument to delay action; indeed, the case for
urgent and immediate action is clear. But, that action must be prudent
and thoughtful, accompanied by continued evaluation and consultation.
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\16\ Id.at ii.
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Second, the Report recognizes that climate change already has
placed disproportionate burdens on the low and moderate income
households and historically marginalized communities. This is why the
framing of every one of the recommendations, and indeed, the entire
Report, considers impacts on low-to-moderate income households and
marginalized communities. Any policy prescription must not exacerbate
existing inequitable burdens of climate change. This is absolutely
critical in ensuring the actions the government takes do not make the
problem worse.
Finally, COVID-19 hit the Subcommittee as it did every other corner
of our country, but there are lessons learned from the pandemic that
are applicable to the climate discussion.
We should take note of the lessons learned from the Covid-19
pandemic: the importance of being decisive leaders, supporting and
creating resilient stakeholders, of ensuring the availability of
timely, consistent, and improved information, and of innovating to
ensure our financial models build in risks and scenarios that are
extreme but plausible in the near and longer term.
If we start building better equipped financial systems now that
both acknowledge and account for the inevitable impacts of climate
change, we can be positioned to avoid the need for extreme shifts in
balance sheet management and fiscal and monetary policy.
Recommendations
The first recommendation of the Report is also the one that
requires Congressional action: The U.S. should establish a price on
carbon. The Report highlights that ``[t]his is the single most
important step to manage climate risk and drive appropriate allocation
of capital.'' \17\
---------------------------------------------------------------------------
\17\ Id. at vi, 9, and 123.
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As the Subcommittee's chairman, Dr. Litterman has pointed out on
several occasions, ``financial markets do an amazing job of allocating
capital in the direction of the incentives that they are given.'' \18\
And that is why, when incentives are appropriate, they can help lead to
innovation, improvements in health and safety, and quality of life the
world has never seen. But when the incentives are mis-aligned, as in
the case of carbon emissions, there is a market failure, and the
incentives go in the wrong direction, things begin to break down.
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\18\ Id. at xix.
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A negative externality is a cost imposed on someone outside of a
specific transaction.\19\ Carbon emissions are a perfect example of a
negative externality. Emissions impose significant costs on society in
the form of current and future climate impacts, but the markets have
not priced in this cost. In other words, the costs of burning fossil
fuels and ``other emitting activities have been treated until now as if
they were `free'.'' \20\ When a negative externality is identified,
``there is a role for the government to ensure those externalities are
reflected in prices.'' \21\ Without a cost in place, ``financial
markets lack the most efficient incentive mechanism to price climate
risks.'' \22\ Though a price on carbon is the single most consequential
action policy makers could take to address climate risk, this
recommendation serves as the context for the Report, rather than its
focus.
---------------------------------------------------------------------------
\19\ See Externalities-The Economic Lowdown Video Series Episode 5,
Federal Reserve Bank of St. Louis, https://www.stlouisfed.org/
education/economic-lowdown-video-series/episode-5-externalities (last
visited Sept. 28, 2020).
\20\ Report at 4.
\21\ Id. at xix.
\22\ Id. at 4.
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In the absence of a price on carbon, there is still an urgent role
for regulators. The Report points out that ``financial regulators
should actively promote, and in some cases require, better
understanding, quantification, disclosure and management of climate-
related risks by financial institutions . . . and other market
participants.'' \23\ Regulators today have the authority to implement
these requirements. The Report argues for critical action regarding
disclosure, stress testing, scenario analysis, and governance.
---------------------------------------------------------------------------
\23\ Id. at 120.
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Another key recommendation of the Report is international
collaboration and harmonization. The U.S. is not alone in facing this
challenge, nor are we alone in identifying policy solutions. When it
comes to pricing carbon, disclosures, stress testing, and scenario
analysis, it's critical that we approach this together with our
international partners. There are a host of international organizations
active in this space. However, as the Report points out, the U.S. ``is
a reluctant participant in these efforts, and in some cases, it is
absent.'' \24\ This seems illogical given the size of the U.S. capital
markets, which are the largest in the world. Indeed, ``[t]he largest
futures exchange in the world is based in the United States . . . .
Four of the five largest asset managers are based in the United States,
and the United States represents the largest insurance market globally
by premium volume. Without active leadership by U.S. regulators and
financial institutions, the mission of prudent climate risk management
will remain incomplete at best.'' \25\
---------------------------------------------------------------------------
\24\ Id. at 121.
\25\ Id. at 8.
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Perhaps my favorite chapter is the last, which focuses on
opportunities in financing the net-zero transition. Unlike many
existing reports, the Report does not just focus on the downside risks.
It makes the case that structural changes and market innovations can
expand capital flows to sustainable finance solutions.\26\ And in the
process, create significant employment opportunities. By one estimate,
the total worldwide investment needed in energy infrastructure to meet
the Paris Agreement goal by 2050 (limiting warming to ``well below'' 2
degrees Celsius) is $110 trillion. That's roughly 2% of average global
GDP per year. That could translate to enormous economic opportunities,
according to the Report.
---------------------------------------------------------------------------
\26\ Report at 103.
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I'll end my remarks with an observation from the Report that
captures the seriousness and urgency at hand: ``A world racked by
frequent and devastating shocks from climate change cannot sustain the
fundamental conditions supporting our financial system.'' \27\
---------------------------------------------------------------------------
\27\ Id. at 2.
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The good news, though, is that we have virtually all of the tools
we need to start our work. With the exception of a price on carbon,
according to the Report, ``existing legislation already provides U.S.
financial regulators with wide-ranging and flexible authorities that
could be used to start addressing financial climate-related risk now.''
\28\ As this Committee's Majority Staff Report \29\ has called for the
Report to be provided to various congressional committees, I strongly
believe all congressional committees with relevant oversight
jurisdiction should consider the policy recommendations.
---------------------------------------------------------------------------
\28\ Id. at iii.
\29\ Select Comm. on the Climate Crisis, 116th Cong., Rep. on
Solving the Climate Crisis: The Congressional Action Plan for a Clean
Energy Economy and a Healthy, Resilient, and Just America (Majority
Staff Rep. June 2020), https://climatecrisis.house.gov/sites/
climatecrisis.house.gov/files/Climate%20Crisis%20Action%20Plan.pdf.
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As one observer noted, we missed the subprime mortgage crisis which
led to the Great Recession; we missed the COVID-19 crisis which has led
to catastrophic loss of human life and economic shock; let us not miss
the climate crisis.
Thank you for your time. I am happy to take any questions.
Ms. Castor. Thank you, Commissioner Behnam. And
congratulations on your report. A 34-to-0 consensus report is
an important signal to everyone, I think.
It is encouraging to see the CFTC issue the report and its
call for urgent and thoughtful action to address ways that the
climate crisis is already impacting important economic sectors
and placing disproportionate burdens on frontline communities.
As you rightly note, the climate crisis poses threats that
we cannot afford to ignore. You have testified that the single
most important step to manage climate risk and drive
appropriate allocation of capital is to establish a price on
carbon. But in the absence of an explicit price on carbon, how
are businesses responding to climate-related risk that may harm
investors or destabilize markets?
Mr. Behnam. Thanks for the question, Congresswoman.
Certainly, businesses are recognizing this. And I think if
you think about the effort and the subcommittee's effort, it
really is a demonstration that the private sector--academia,
public interests--are doing a lot of work in this space. They
recognize the risks, and they are taking steps towards managing
and mitigating those risks.
From small businesses, midsize businesses, and large--you
know, if you look at the diversity of the committee, we had
large banks, asset managers, energy companies, agricultural
companies, and a slew of other institutions in the financial
services space and academia and public interests.
So there are private sector initiatives to come up with
disclosure regimes, to come up with matrices, and new, sort of,
methods of measuring risks and disclosures. There is a number
of efforts going on overseas to help, sort of, think about
policy in this space. So I am very encouraged by the work that
has been going on in the private sector. I think it absolutely
is a template.
And one clear message from the recommendations that really
covers all of the recommendations, in a sense, is that we have
to work together, it has to be collaborative, we have to work
domestically and certainly internationally, but it is an
iterative process. I noted that in my opening statement. We
have to be flexible as policymakers, both elected officials and
regulators, and we have to expect change.
Climate change is not predictable, it is not linear. A lot
of things will happen that we cannot predict based on science
and the data that we have today, so that, as we sort of enter
this process and really start to transition to a net-zero
economy, we have to be willing to be flexible, work with
private sector participants, and adapt on the fly. Because that
is really going to be the only way to address these issues
head-on and find solutions.
Ms. Castor. All right.
So let's talk about your favorite chapter of the report,
the opportunities related to financing the net-zero transition.
In your view, what are some of the economic growth and job
opportunities Americans could expect to see if Congress
implemented the recommendations in your report?
Mr. Behnam. Thanks.
You know, there are eight chapters in the report. It is
fairly long. It gets into the weeds. But it is very
comprehensive, and I think it is long past due. But most of the
report, as you would imagine, focuses on risk and the steps
that we need to take potentially to address the risk in the
coming years.
But, to your point, chapter 8 is this great, sort of, end
of the report that I think creates a lot of opportunities and
really sends an opportunistic opportunity for market
participants that, you know what? There are a lot of risks with
climate change, but there are a lot of opportunities as well,
and we need to seize those.
The amount of money flows going into renewable energy, I
think there have been statistics--and they are cited in the
report--$110 trillion between now and 2050 will go to renewable
energy development; $4.5 trillion in the U.S. over the next
decade or two to redo our electricity grid. These are obviously
immense amounts of capital. The financial markets can play a
huge role in allocating that capital to where it should go.
And, ultimately, it is just going to create jobs. BLS, the
Bureau of Labor Statistics, I think says two to three new jobs
are focused on wind and solar. As you pointed out, the wages
have a premium to the average mean for salaries.
There are a lot of opportunities, as we think and emerge
out of COVID, how are we going to rebuild the economy, how are
we going to think about a 21st-century economy and build an
infrastructure that is resilient to future climate challenges
and really provide an economic spark for growth and prosperity
for decades to come?
So I think there is a lot of excitement in this space, and
folks should be very interested in the opportunities, I think,
for both employment and productivity across the board.
Ms. Castor. And do you agree that those opportunities are
international, that the clean energy transition will be a
global one? How do you think America can best position itself
to benefit and lead the transition?
Mr. Behnam. You know, when I think about that issue, the
international alignment issue--because it is critically
important. This is an international issue. It is not a U.S.
issue, it is not a geographic issue. It is certainly a global
issue--I think about this in the context of U.S. markets,
capital markets, derivatives markets being the most desirable
in the world. I think about Silicon Valley being the envy of
the technology world. I think about academia. U.S. academics
and our institutions of higher learning are the envy of the
world.
As we have, you know, endured for many years to be energy
independent, I think we have to think about the future, the
next few decades. We have to think about energy independence,
and the opportunities are now to provide the U.S. with the
independence that we will need for the decades to come.
And, obviously, that affects our environment, that affects
human health. Ranking Member Graves mentioned this for sure,
but we need to think about national security, as well, and what
are we going to do and how are we going to position ourselves
in the decades to come?
And I think this is the opportunity. As we see these
amazing capital flows going to renewable energy, we have to
seize on our capital markets, we have to seize on our
academics, we have to seize on our industrial base and our
middle class, and really start to innovate so that we can be
the centerpiece of the renewable-energy transition for years to
come.
Ms. Castor. Outstanding. Thank you.
Ranking Member Graves, you are recognized for 5 minutes.
Mr. Graves. Thank you, Madam Chair.
Commissioner, again, welcome, and appreciate you being here
today.
What role do you see U.S. competitiveness playing in this
larger issue? You have mentioned this being an international
issue a number of times today already. What role do you see
that playing?
Mr. Behnam. Congressman, I totally appreciate your point
about, really, the competitive element of the transition and
what we can do. I think and I am a firm believer that we have
to take a leading role in this.
Naturally, if we take steps toward transitioning to a net-
zero economy, we could potentially put ourselves at a
competitive disadvantage in the short term. But climate change
is a long-term issue. It is one that we have to think about
over the next 10, 20, 50, 100 years and more. And I think, you
know, historically, the U.S. has had a leading role in any
number of policy issues, and I really think this is an
opportunity for us to really elevate the rest of the world in
demonstrating our leadership both on the production side and
the consumer side so that others will follow.
And, you know, it is not going to be a smooth ride. Again,
in your opening statement, I couldn't agree more, there are
going to be roadblocks and barriers. But a lot of the report
focuses on flexibility and understanding that we are going to
have to adapt over the course of the next few years and decades
to address the climate risks.
Mr. Graves. And you did talk about flexibility, you talked
about working within the international community. I totally
agree.
When you talk about flexibility, do you think it is
appropriate for us to choose the energy technology winners and
losers? Or do you think it is better for us to allow the market
to effectively innovate, as they do, and, kind of, innovate us
into the solutions that are needed, as in the past the United
States has done, by reducing emissions more than any other
country?
Mr. Behnam. I certainly support what you say, that we
need--I would err on the side of not picking winners and
losers.
I think if you think about the first recommendation and the
carbon price, if there is a carbon price, capital will be
allocated to different industries, and I don't think it is
going to be industry-specific or product-specific; it is just
going to be focused on renewables and, sort of, supporting the
innovation in that space.
Mr. Graves. Well, but why do you say renewables only, when
we have proven that we can actually complement conventional
fuels with carbon capture, storage, and utilization technology
and end up with net-zero emissions or even maybe net reduction
in emissions through some new emerging technologies? So isn't
it----
Mr. Behnam. Congressman----
Mr. Graves [continuing]. Emissions we are targeting, right?
Mr. Behnam. Yeah, absolutely. And from a carbon capture
standpoint, I can't speak specifically to the technology and
where it is, sort of, in the arc of its growth and development.
But I think, at this point, when you think about the core
energy sources that could sort of help us transition in the
short term, a lot of the renewable sources, whether it is wind
or solar, are going to be there, but carbon capture, I know, is
developing--you know, I don't know about quickly, but it is
developing and certainly is going to play a key role in our
net-zero transition.
Mr. Graves. And you mentioned earlier that the U.S. should
play a leadership role. You talked about that would cause
volatility. What degree of volatility do you think is
acceptable?
Mr. Behnam. I can't put a number on it specifically, but I
will say this: In terms of--and this kind of goes to the issue
of transition risk, which the report talks about.
As we move forward, there is going to be transition risk. I
think we need to continue moving forward regardless of, sort
of, the bumps along the road. Because the longer we take to
transition to a net-zero, the shock that we may face down the
road because of a climate disaster or a growing climate event
will be greater. So----
Mr. Graves. But it also----
Mr. Behnam [continuing]. As we transition----
Mr. Graves. We would also have greater volatility or an
exacerbated volatility by moving unilaterally, which is why you
have said numerous times that a carbon price or other types of
solutions must be done in a multilateral or an international
format. Did I understand that correctly?
Mr. Behnam. That is correct. But I think, by not moving, we
are only creating essentially a feedback loop on the climate
issue that will just grow if we don't transition.
Mr. Graves. I am not going to argue with you at all on
that, but do you----
Mr. Behnam. Yeah.
Mr. Graves [continuing]. Just ``yes'' or ``no,'' because my
time is running----
Mr. Behnam. Yeah, yeah.
Mr. Graves [continuing]. Just ``yes'' or ``no,'' and I
don't mean to box you on this one, but----
Mr. Behnam. Sure.
Mr. Graves [continuing]. Don't you agree that, with the
momentum we have already built up through greenhouse gas
concentrations, resiliency investments are some of the best
things we can do to help provide certainty and put brackets on
the uncertainty, right?
Mr. Behnam. Yes.
Mr. Graves. Because we can't do anything about the momentum
that is already in the environment.
Mr. Behnam. Yeah.
Mr. Graves. Yeah.
And then, lastly, Madam Chair, I just want to read in the--
in the Senate Democrat report, they say that it is a global
issue and unilateral action could harm the United States,
agreeing with the Commissioner's comments.
They say that increased overall production--it would
increase overall production costs, that, left unchecked, the
policies would threaten U.S. competitiveness. It said, ``quote,
we could see U.S. companies shift their production overseas.''
And they further acknowledge, quote, ``it will not only lead to
an increase in total global emissions but also outsources the
American jobs.''
So the Commissioner's comments about this international
approach, not moving unilaterally, I think is really key here.
Last thing, Madam Chair, I just want to clarify that--it
was mentioned that this is a CFTC report, and I don't believe
it was actually a CFTC report. I think it was the
subcommittee--or your report that the subcommittee then
approved.
Mr. Behnam. That is correct.
Mr. Graves. Yeah.
Thank you. Yield back.
Mr. Behnam. Thank you.
Ms. Castor. Yeah, I think we understand it is going to take
an international approach. And I wish we would have had more
GOP Members join us in our Climate Action Now bill that just
said simply that the U.S. needs to remain in the international
climate agreement.
So, at this point, I will recognize Congresswoman Bonamici
for 5 minutes.
Ms. Bonamici. Thank you, Chair Castor and Ranking Member
Graves and to our witnesses.
I represent a district in Oregon. Nearly a million acres
have burned across my home state in the last month as a result
of historic winds and dry fuel conditions. Air quality has
surpassed hazardous levels and at times has been comparable to
the most polluted places in the world, further endangering the
health and livelihoods of those already at risk of respiratory
issues from the coronavirus pandemic.
Many Oregonians have been placed under evacuation orders,
and hundreds have lost their homes. And if this immediate
crisis were not enough, many experts are predicting significant
flooding and landslides this winter as precipitation increases
and soil remains unstable.
So, Commissioner, I thank you for your testimony.
In your testimony, you have noted that the CFTC is focused
on extreme but plausible scenarios. So how can the compounding
crises of the coronavirus pandemic, raging wildfires in the
West, and extreme weather events in the Gulf over the last
month inform our understanding of financial market risks in the
future?
And can you please explain how these examples further
demonstrate that the cost of inaction may be higher than the
cost of transitioning to a 100-percent clean energy economy?
Mr. Behnam. Thanks, Congresswoman.
One thing I would point out--there can be a lot of answers
to that question. It is a great question. There is a term used
in the report called ``subsystemic shocks.'' We obviously dealt
with systemic shock in the 2008 financial crisis. But, to your
point, you have a series of regional weather events that happen
at any one time. We are not accustomed to them happening
together or, sort of, compounded. But these are the extreme
events that are plausible, and we are seeing that on a day-to-
day basis, and that we need to plan for. Obviously, an unlikely
scenario, but something that we should plan for.
And the unfortunate reality, as you pointed out, with our
wildfires out West and then the flooding because of the
hurricanes in the Gulf Coast, you can start to see the pattern
of what might happen if you then compound a series of flooding
over the spring/summer season that would affect the
agricultural productivity or Gulf Coast hurricanes going up the
East Coast.
With these subsystemic risks, you are going to have local
issues and local challenges for regional economies, regional
growth and productivity, regional financial institutions in
terms of credit and lending. And, again, if you have that
extreme scenario where a couple of these events happen at the
same time, that subsystemic risk could certainly rise to a
systemic shock nationally. We learned very clearly in 2008 the
interconnectedness of the financial markets, and we have to be
aware of that.
In terms of transition risk, I would say, yes, we are going
to face bumps along the road, as I pointed out with Ranking
Member Graves. It is going to be difficult, but that goes to
the point of being flexible and iterative as we go forward. But
I still think we have to move forward.
If we don't move forward and just use these challenges and
these bumps as reasons to stop, we are only, sort of, creating
a feedback loop of creating more climate risk because of carbon
emission.
Ms. Bonamici. Right. Right. And the cost of inaction is
pretty clear.
So our committee's climate action plan calls for a Climate
Risk Information Service to develop localized climate risk
information that will include projections of floods, wildfires,
and other natural disasters. And this approach is designed to
better inform the development of resilience codes,
specifications, and standards for local communities. And I am
working now to turn this recommendation into a standalone bill.
In chapter 5 of the report, the CFTC subcommittee
recommends that financial regulators and the private sector
should support the availability of consistent, comparable, and
reliable climate risk data and analysis.
So what climate risk data is the most important for
integration into financial models? And are there any gaps that
Congress should be aware of?
Mr. Behnam. Congresswoman, it is a great question. In my
view, the heart of solving this problem, among many other
strategies, is data and disclosures.
There have been a lot of efforts in the private sector, as
I pointed out, in terms of identifying data. A lot of this is
yet to be determined. I think there are a lot of academics that
are working on this, private market participants that are using
climate science to identify what type of data would identify
risk to the financial system that could be then, sort of,
caught before issues happen.
I would recommend, sort of, working with some of the
private institutions that have started thinking about this.
Under the Financial Stability Board, the Task Force on Climate-
Related Financial Disclosures has done a lot of work in this
space.
Any effort to get the data and disclosure that is needed is
going to, again, have to be collaborative. It is going to have
to be a public-private partnership. But data is critical. And
having a data source that is shared among public and private
participants is going to be critical to addressing these
issues.
Ms. Bonamici. Terrific. Thank you very much.
I am going to yield back the balance of my time. Thank you,
Madam Chair.
Ms. Castor. Thank you.
Representative Palmer, you are recognized for 5 minutes.
Mr. Palmer. Thank you, Madam Chairman.
I just want to ask the witness, if the U.S. achieves net-
zero, what is the net effect that it will have on climate
change?
Mr. Behnam. Sir, thanks for the question.
I can't answer that with complete certainty. I am not a
scientist. But, you know, from my basic understanding, as we
shift towards net-zero--you know, as we think about carbon
emissions and greenhouse gas emissions, there is, you know,
heat capture in the atmosphere, which is causing rising air
temperatures, rising sea levels, and is, you know, connected to
the weather events that we are seeing, these more extreme, more
frequent weather events.
Mr. Palmer. Well----
Mr. Behnam. So, based on my understanding and what the
science would say, if we can achieve net-zero, then we can
start to think about reducing carbon in the atmosphere and
hopefully stabilizing the atmosphere.
Mr. Palmer. Well, the answer that we have gotten in this
committee in previous hearings is that, if the U.S. went to
absolute-zero--not net-zero, absolute-zero--it wouldn't have
any impact on climate change.
And I understand the climate is changing. I think that CO2
emissions have a warming effect. But the bigger problem is the
climate change we can't do anything about that is occurring
through natural variations.
So, considering that the scientists say that if the United
States went to absolute-zero that it would have no impact on
climate change, does it make sense to put the country through
the economic devastation that these policies would create
instead of investing more in adaptation and resilience, as my
colleague Congressman Graves has pointed out?
Mr. Behnam. Sir, I would point out that, specifically with
respect to the CFTC report, it really focuses on what you said,
that, regardless of what you think has caused the change in
climate, I think there is, you know, fairly broad acceptance
that the climate is changing and that we need to adapt to that.
From a financial markets perspective, that means building
in new scenarios, that means building up new information data
sets that we disclose to regulators and investors, that means,
you know, adapting our best practices in governance so that we
can adapt to a changing climate.
Mr. Palmer. Well----
Mr. Behnam. Again, I can't answer the scientific questions
of the climate change and how a net-zero economy will affect
it, but I am speaking from a financial regulator standpoint
that----
Mr. Palmer. Reclaiming my time----
Mr. Behnam [continuing]. There is a----
Mr. Palmer. Reclaiming my time, the point is that most of
what is being proposed in the Green New Deal and these other
policies, it is all about eliminating CO2 emissions, when we
know that doesn't really affect climate change, especially if
the rest of the world is not doing it. And even if the entire
world went to net-zero or to absolute-zero, it would only
mitigate the impact.
So it is kind of like recommending extensive chemo for
someone who doesn't have cancer or has another disease. It
might have, you know, a mild impact, but the remedy would be
worse than the disease. And that is the problem that I have
with some of these policies.
And, you know, I have looked at what is going on in other
places around the world and how they have adapted and built in
resiliency for everything from sea level rise to floods to
wildfires. And despite what my colleagues from the Western
States on the other side of the aisle think about forest
management, forest management is the best solution to
controlling wildfires. And that is part of the resiliency that
you build into your forests in anticipation of extreme weather
events.
So the stuff that I have looked at indicates that we are
far better off to do adaptation, build in resiliency, but do it
in a holistic manner that takes into account the climate change
that we can't do anything about that occurs from solar
variations and other natural phenomena that, frankly, we can't
deal with.
I think there are a lot of people, a lot of companies that
like the old idea of the cap-and-trade and the carbon tax
because they are going to make a boatload of money out of it,
but it really doesn't do anything to solve the problem of
climate change.
And my last question to you, sir, in the few seconds that I
have left is: Do you support the Green New Deal? Apparently----
Mr. Behnam. Sir, I am not----
Mr. Palmer. Apparently, the Democratic nominee, Biden,
doesn't support it anymore. I just wonder if you do.
Mr. Behnam. Sir, I am not going to--I have not examined the
Green New Deal front to back. I am a financial regulator. I
certainly think about climate change issues, but not in the
weeds enough on the Green New Deal to take a position.
Mr. Palmer. Well, I thank the gentleman for his honesty,
and I do thank you for your work.
And I yield back.
Mr. Behnam. Thank you.
Mr. Levin. Chair Castor? I am sorry, I didn't hear you.
Ms. Castor. Yes. Congressman Levin, you are recognized for
5 minutes.
Mr. Levin. All right. Thank you very much. I appreciate
that.
And thank you for having this hearing today. Extremely
important topic. Because, obviously, climate change isn't only
a threat to the health of our communities but also to our
economic prosperity.
And it is important that those risks are explained and
quantified, which is why I am very grateful to work with my
friend, Representative Casten, on the Climate Risk Disclosure
Act, which he has just done a great job leading. His bill would
require public companies to disclose how they will be impacted
by the climate crisis and create an environment of transparency
for investors. And I am really grateful for Representative
Casten's leadership in this space on the Financial Services
Committee.
Commissioner Behnam, I was pleased to see the CFTC climate
subcommittee report recommended that U.S. regulators should
join as full members international groups focused on exchanging
information on monitoring and management of climate-related
financial risks, including the Network for Greening the
Financial System.
As you know, the Network for Greening the Financial System,
or NGFS, is an international organization of central banks
committed to meeting the goals set forward in the Paris
agreement. There are currently 72 active members of the NGFS,
including the central banks of Canada, China, Germany, and most
European countries.
However, despite our international partners' membership,
the U.S. still has not joined the NGFS. In May, Representative
Casten and I led a letter to Fed Chairman Powell urging him to
join the NGFS as an active member.
So, Commissioner Behnam, do you believe the U.S. should
join international climate finance organizations, like the
Network for Greening the Financial System, as recommended in
the subcommittee's report? If so, why is it important for the
United States to participate?
Mr. Behnam. Thanks, Congressman.
Yeah, as you point out, this is one of the recommendations
in the report. And as I mentioned earlier, both in my statement
and in response to the chair's question, international
alignment is key on any climate change issue, whether it is
dealing with the environmental impacts or, of course, in the
context of this conversation, the financial resiliency impacts.
So I agree with the recommendation. I think it is important
that we work with our partners, and, as you said, that is a
growing coalition of central banks and other regulators and
policymakers. And I think it would be helpful to be a part of
that dialogue so that we can address these issues in a more
holistic manner.
Mr. Levin. Thank you for that.
I was also happy to see the CFTC report acknowledged that
the Financial Stability Oversight Council, which is charged
with monitoring and identifying emerging threats to our
financial stability, should, and I quote, ``incorporate
climate-related financial risks into its existing oversight
function, including its annual reports and other reporting to
Congress,'' end quote.
In August, Senator Schatz and I led a bicameral letter
urging Treasury Secretary Mnuchin, as Chair of the Financial
Stability Oversight Council, or FSOC, to consider climate risk
when responding to emerging risks to the stability of our
financial system. I was disappointed, we got a one paragraph
response from the Treasury Secretary stating that, quote, ``at
this time, this is not a systemic risk that warrants FSOC
review,'' end quote.
So, Commissioner, what role do you think the Financial
Stability Oversight Council should play in monitoring and
identifying climate-related financial risks?
Mr. Behnam. Thanks again, Congressman.
You know, the FSOC was created in Dodd-Frank, and it was
really, in my view, a response to the financial crisis and how
we were not really looking at the financial system as
holistically as we needed to. Obviously, we have a patchwork of
financial regulators that deal with very different, discrete
issues, whether it's a market regulator, like the CFTC, or a
prudential supervisor, like the Fed. And FSOC serves as this
really great central point of contact within Treasury, using
all of the leads of the financial regulators to examine issues.
So I do think it would be a very good issue to examine.
Climate change is probably not something--again, as I said,
that people think of financial markets when they first think
about climate change. I also think, you know, you can use as an
example, before the COVID pandemic, in the February-March
period, you know, if you asked a few people a couple years ago,
would you have thought that this would cause, you know, market
instability and the issues that we experienced in March--that a
health pandemic would cause the instability and the issues we
saw in the March-April period, you know, a lot of people would
probably say no. You don't draw those connections. But the
COVID pandemic was a clear, I think, example of how any crisis
in the economy or in the country is going to have a direct
effect on the financial markets. We have the economy,
obviously, as a proxy.
So a climate crisis and the impending climate issues we are
going to deal with in the next couple decades, I think, demands
at least a starting discussion. And FSOC, I think, is a good
place to start that discussion.
Mr. Levin. Thank you, Commissioner.
I am out of time, but I thank the chair again for having
this important hearing today.
Ms. Castor. Representative Miller, you are recognized for 5
minutes.
Mrs. Miller. Thank you, Chair Castor and Ranking Member
Graves.
And thank you to Commissioner Behnam for being here today.
Can you hear me?
Mr. Behnam. Yes, ma'am.
Mrs. Miller. Okay. Thank you.
Commissioner Behnam, your report notes that a small group
of states have a carbon price.
According to the most recent EIA data on carbon emissions,
since 2010 those states have underperformed the rest of the
country in reducing emissions. In addition, those states have
electricity and energy prices significantly higher than the
rest of the country. Furthermore, those states are now major
importers of energy from other states.
My state of West Virginia reduced emissions by nearly 10
percent from 2010 to 2017, nearly 20 percent since 2005, while
California's emission levels were unchanged from 2010 to 2017
and only a paltry 5 percent below in 2005. At the same time,
retail electricity prices in California are 78 percent higher
than West Virginia's. I can't remember a time in West Virginia
when we suffered from rolling blackouts because of energy
starvation.
If we have reduced emissions more and have cheaper energy
and we don't have any blackouts, what is the argument for my
state to become more like California?
Mr. Behnam. Congresswoman, thanks for the question. Again,
you know, I would just reiterate that the report is focused on,
sort of, financial resiliency and not necessarily specifically
the transition.
But, you know, my response to your point--and, you know,
there is the RGGI in the Northeast, and I know California has
its own system. You know, these are--this goes to the point
about this being an iterative process that has to be flexible
along the way. It is not going to be perfect. It is going to
have to build and probably be rebuilt and, sort of, evolve over
time. And, you know, I would suggest that, to your points,
which are very valid points, that people will have to adapt,
systems will have to adapt, as we move forward to a net-zero
economy.
Mrs. Miller. Well, I hope we have a lot of flexibility,
because I don't want to adapt to be like California.
And, furthermore, I noticed that you mentioned in your
testimony that your report recognizes that climate change
already has placed disproportionate burdens on the low- and
moderate-income households and historically marginalized
communities.
In order to combat climate change in West Virginia, we had
a misguided renewable standard that forced our low-income
individuals to choose between paying for their groceries or
keeping their lights on.
In fact, in California, civil rights leaders sued the state
because the State of California's climate policies had a
negative and a regressive impact on the poor and people of
color.
Commissioner, how would you respond that moving away from
affordable baseload energy and, instead, moving towards
expensive renewables actually harms low-income individuals and
people of color?
Mr. Behnam. Congresswoman, again, I am going to focus on
the resiliency standpoint. I think it is important, as a
broader matter, that we transition.
Obviously, as you pointed out, the report suggests and
there is evidence that climate change disproportionately
affects low- to moderate-income communities and rural
communities. As we think about policy--and I know the report
outlines this specifically--it recommends research and it
recommends thinking to, sort of, address these unintended
consequences.
I can't, again, speak to the specifics of West Virginia and
what has happened there. But, again, to my earlier response to
your first question, we have to adapt and we have to work
towards the transition so that we don't have unintended
consequences and burden. But, ultimately, I think it is
important that we move forward. Because if we don't move
forward, we are going to continue to, sort of, endure these
more extreme, frequent weather events.
Mrs. Miller. Well, I think unintended consequences are so--
we need to be so careful with how we legislate. I know, with my
older retirees, when their electric bills tripled, they really,
really struggled.
I yield back my time.
Ms. Castor. Rep. Casten, you are recognized for 5 minutes.
Mr. Casten. Thank you, Chair Castor.
And thanks so much for being here, Commissioner Behnam.
I am excited, and notwithstanding some of the doom-saying
from my colleagues across the aisle, we all know that replacing
old, amortized, high marginal cost generation sources with new,
zero marginal cost generation sources makes us all wealthier.
Thank you.
We also know that for 30 years we have made consistent
arguments that we shouldn't act until others do. Over those 30
years, we have elected some 15 Congresses, and every single
person who ever ran for office claimed that they were capable
of leadership and then sits here in these chairs and says,
``God forbid we lead.'' Commissioner Behnam, thank you for
leading.
In your report, you recommend that public companies
disclose their exposure to physical and transitional risks.
Now, I think it is obvious how that benefits investors in those
companies who might bear those losses. Can you explain a bit
about how those disclosures might help the companies
themselves?
Mr. Behnam. Thanks, Congressman.
Ultimately, you know, disclosures are a key part of this. I
mentioned this earlier. Information--better information--allows
regulators and investors to make more informed decisions.
I think as the community of public companies starts to
think about what climate risks are, I think it is just going to
allow them to adapt to, again, a changing climate in the future
and create more efficiencies for the company from both an
employment standpoint and a productivity standpoint.
The challenge is coming up with the common data sets, the
metrics to measure risk by. One of the biggest challenges in
the disclosure space is, sort of, what constitutes material
risk. Material risk is a standard term for public companies
under the SEC's 1934 act, but climate change is very different
than, sort of, traditional material risk, I think, in my view,
from what it is normally--from what the Commission and public
companies expect.
So we have to rethink that issue so that companies can
assess climate risk better in the short, medium, and long term.
Mr. Casten. Yeah. I am glad you raised that. You know, I
think there is the separate section about disclosing emissions,
which obviously is a separate issue, and that is easy. I have
sort of compared the challenge that you described to being why
we created generally accepted accounting standards, right? We
need a standard way to disclose financial liabilities in the
same way we need a standard way to describe environmental
liabilities.
On the disclosure of emissions, can you discuss--and just
briefly, because I do want to get to a couple last questions--
how that benefits investors in companies, knowing how much a
given company emits?
Mr. Behnam. From an investor standpoint, the more
information, the better, right? It is making the most informed
decision. And whether it is scope 1, scope 2, or scope 3
emissions, I think, for an investor, in institutional or retail
or a pension, having an understanding of what type of emissions
exist is certainly potentially going to affect the bottom line.
And that could come from a transition standpoint--
transition risks being anything influenced by policy, consumer
preference, or technology changes. And then, ultimately, you
know, as we are seeing now, if emissions are a big part of a
company's, sort of, production, then it could potentially, you
know, lead to a stranded asset, which is a term that is often
used within the context of transition risk.
And these are the types of decisions and information that I
think are super valuable to investors to make more informed
decisions.
Mr. Casten. I feel like I want to go out for a beer with
you at some point. And, by the way, I love the book ``Titan.''
I am looking at it on your back shelf.
Well, here is to transparency of risks and ensuring that
markets can better allocate capital. As Mr. Levin pointed out,
I have introduced H.R. 3623, the Climate Risk Disclosure Act,
which would direct the SEC to require companies to disclose
these physical, these transitional risks, these emissions
risks.
From your vantage point, do you believe the SEC has the
authority to fulfill those obligations in the absence of
legislative action?
Mr. Behnam. Sir, from my understanding and from the report,
I believe the authority is there to make those changes.
Mr. Casten. Do you believe they have the obligation?
Mr. Behnam. Under current rules, I think, given--in my
view, given the material element and material risk of climate
change, yes.
And this is to my point earlier. Climate risk should be
mandatory, and it should be clear, and it should be
understandable. And, you know, the existing system and the
existing disclosure system, although good and effective--for
what we have done and built over a number of decades in terms
of public company disclosures, it is fine, but, as we deal with
climate risk, which is more forward-thinking, is nonlinear and
creates a new and really unknown set of risks, I think to rely
on the older existing system is really not going to be able to
give both regulators and investors the information they need.
Ultimately, you know, if you don't have clear, sort of,
guidelines, I think, from an issuer standpoint to know what
needs to be disclosed from a climate risk perspective, it is
going to be become very subjective of what constitutes climate
risk, what constitutes material. And that is, I think, where
there needs to be a little bit more clarity and certainty from
the SEC so that issuers can pinpoint exactly what climate risk
is and what needs to be disclosed in these documents.
Mr. Casten. Well, that is fascinating. I am out of time,
but I really do, from the bottom of my heart, thank you for
your leadership.
And I yield back.
Ms. Castor. Great.
Rep. Huffman, you are recognized for 5 minutes.
Mr. Huffman. Well, thank you, Madam Chair.
And, one of these days, I would love to get some of our
colleagues out to California. We hear a lot of this California
bashing, but it would be great to help them better understand
the difference between the unit cost of energy and people's
electrical bills and other things, help them understand that
the direction that California is going, toward a clean energy
future, is not somehow empowering of the Russians or the
Saudis. It is actually quite threatening to the energy
influence of those regimes.
But it is also quite threatening to the profits of the
fossil fuel industry. And that is what this really is all
about.
In any event, if a desire to understand California's
leadership on these issues is there, we would love to have them
out to visit and to better understand these things.
Commissioner Behnam, thanks for your testimony.
I am speaking to you from California, where we are
experiencing the ``airpocalypse'' that you describe--
dangerously high particulate pollution due to wildfires that
are brought to us by this addiction to fossil fuel and the
extreme weather that climate change is going to bring more of,
not just to California but other places around the West.
This is an historic year, to be sure. We have more homes
burning, we have more communities devastated, and more lives
tragically lost. And the communities I represent see this
climate risk firsthand, but the world of financial markets too
often just sees these as dollars and cents on a spreadsheet,
these risks.
So I really do want to thank you for working to bring
attention to the real-world consequences of climate risk.
And your recommendations note the importance of driving an
appropriate allocation of capital, as financial markets,
obviously, can do amazing things when they respond to
incentives that are properly given, but we have to get those
incentives right.
When the incentives are wrong, we know we get disastrous
results. And that happens when we let climate polluters
externalize the costs of their pollution, when we don't factor
in the impacts and costs of climate change, including to public
health. We are going to get more extreme weather events--
droughts, heat waves, wildfires, hurricanes--and we need to
factor in what that really means for people and communities all
over this country.
So you mentioned that, without active leadership by the
United States, including its regulators, private capital really
can't be fully unleashed to bring us this fast transition to
clean energy, to a net-zero future that we need.
I want to ask you about what happens when we not only fail
to send those regulatory and policy signals but when we do the
opposite--when we withdraw from the Paris Agreement, when our
President rejects and trivializes climate change and claims
science doesn't know.
When this happens, do we see private capital go the wrong
way? Do we see it continue to flow into dead end fossil fuel
projects and technologies that actually makes these climate
impacts worse?
Mr. Behnam. Thanks, Congressman, for the question. I would
say, and this is a result of sort of my experience with the
subcommittee that I formed and the report they came up with, it
is pretty remarkable what the private sector has been doing.
And I think there is a recognition from the private sector that
climate risk is real and that they want to protect their
institution and their bottom line for the future and that
addressing climate risk is important. I think also there is a
natural sort of bottom-up flow from consumers and clients that
are really forcing the institutions to start thinking about
climate risk and building in some of these ESG factors which I
am sure you are familiar with.
So, on the one hand, I am very sort of comfortable, and it
is confirming a lot of what I thought, that the private sector
is working toward, but this is a public-private sort of
challenge. It is the problem of the commons, and we have to
work together. And it really becomes important, I think, for
the public sector to push so that we can understand things
better, assess risks better, and have a level playing field for
domestic and international partnerships.
Mr. Huffman. All right. Thank you.
Commissioner, could you talk a little more about the
importance of disclosure so that private capital can actually
understand and act upon the areas of greatest climate risk?
Mr. Behnam. Sure. Like I pointed out, disclosure is
information to me. As I kind of break it down, it could be
anything from disclosure to regulators or disclosure to
investors and pensions. Having as much information, and this
goes without saying, with any decision we make in life, when we
are more informed, we are going to make better decisions,
better for us, better for our families, better for our
communities.
So disclosures are key, but the information underlying the
disclosures is also. It cannot be subjective. It has to be
objective, it has to be fair, it has to be counted, and it has
to be understandable, and it needs to assess the risk
appropriately. And this really goes to the point of how we need
to work both, you know, internationally and domestically to
come up with a system, you know, working with the private
sector, and a set of benchmarks that will collect the data that
is necessary and will, you know, provide us the information we
need to make the most informed decision.
Mr. Huffman. All right. Thank you, Mr. Commissioner.
Thank you, Madam Chair, I yield back.
Ms. Castor. Thank you.
Congresswoman Brownley, you are recognized for 5 minutes.
Ms. Brownley. Thank you, Ms. Castor.
And thank you, Commissioner, really, for your leadership in
this area. I loved the end of your testimony when you said we
have missed subprime mortgage crisis, we have missed the COVID-
19 crisis, and we can't afford to miss the climate crisis. And
I think most of us here are clearly aware of the urgency of
climate.
So my question is, if--you know, if Congress, let's just
say hypothetically that Congress did its part and, you know,
invested significant Federal dollars into a clean economy in
the ways we sort of laid out in our report, but the financial
regulators don't do their part, don't implement their
recommendations, you know, what is the net effect of that? How
does it slow us down?
Mr. Behnam. Thanks, Congresswoman. Yeah, this really goes
to a key point in the report in that financial markets are
extremely powerful. And if the incentives are correct,
financial markets are going to be this amazing tool to allocate
capital in the right place where the incentives push them. So
if the incentives are in the right place and they are in line
with some of the transitioned goals that the committee--your
committee--advocates, and financial markets will certainly
support and, I think, move that transition much quicker and
much more efficiently so that we don't face the transition
risks, which I spoke about a little bit earlier.
Ms. Brownley. So I wanted to go back to carbon pricing for
a minute. You know, you are stating very clearly that investors
and regulators now have come a long way in terms of
understanding the importance of climate risks and, you know,
financial stability. And, you know, you say in your report
carbon pricing is really, you know, the most important part of
that whole equation, and that is something that Congress has to
do, that the markets really can't do it.
So I guess my question is, you know, when is it going to be
when the financial markets and the industries are knocking on
all of our doors here in Congress, saying in one voice that we
need to move forward on this, we need to have an actual carbon
price? When is that going to happen?
Mr. Behnam. Well, you know, there are a number of groups
that include companies from all industries that are--that
already support a carbon price. So I would say we are not too
far off. You know, even if you look at my subcommittee, I
mentioned this earlier, you have a range of institutions, from
banks and institutional investors to energy companies and
agricultural companies, and a carbon price was the first--and
the chair of the subcommittee said this--but the carbon prices
were the first thing they agreed on, and it wasn't really in
question or debated.
And it really comes to the point of allocating risks.
Carbon is a negative externality right now. There is no cost to
it. It affects the atmosphere, and no one owns the atmosphere.
So unless there is a price on carbon, there is really no risk
to it. And if there is no risk to it, then the markets won't
react around that risk and that cost.
So if we are going to move the transition to net-zero
smoothly without too many bumps along the road, then I think
having a price on carbon is going to incentivize that move very
clearly, eliminate the transition risk as much as possible, and
get it to where we need to be to protect our environment, our
economy, and our national security.
Ms. Brownley. So last question is, there still seems to be,
I think, a misperception among investors that, you know,
investing--investing in climate and gaining good returns on
that investment, that, you know, that they believe that that
is--we are still not there yet, in terms of getting the kind of
return that they want on their investment.
So how do we--you know, how do we change that misperception
that is out there? It sounds to me, based on everything you are
saying, that it is changing. And the people who are--you know,
many have already changed their mind and moving in that
direction. And I think the more investors there are advising
clients, more people in the financial markets advising their
clients and so forth in terms of investing that kind of
capital. But what can we do to sort of change that perception?
Mr. Behnam. You know, institutional money is going there.
Preferences are changing. You are seeing the growth in this ESG
space, environmental, social, governance, investing pocket,
grow really exponentially. And, if nothing else, that is the
proof that there is demand for these products, there is an
understanding that these products have long-term value, and
that in the end, the return on your investment will be
positive, and if not greater than, a traditional sort of asset.
I think from a regulator or an elected official standpoint,
it really goes back to just more clarity of understanding what
constitutes ES&G, and any other thing in the sustainable
finance space. These are all very different things. We have
different sets of metrics, as I pointed out earlier. There is
the domestic versus the international standard. Coordination
along this line is just key so that investors know exactly what
they are investing in, and especially down to the retail level
as well, whether it is a retail investor on their, you know,
computer investing in assets, or an institutional investor or a
pension investor. You need to know what you are investing in,
you need to know what the comps are, and you need to have a
firm understanding of what constitutes sort of environmental or
sustainable investing. So I think there is a role for
policymakers in the public sector in that respect.
Ms. Brownley. Thank you very much, and I yield back my
time.
Ms. Castor. Thank you.
Well, thank you, Commissioner Behnam, for your outstanding
testimony today. We really do appreciate all the hard work you
put in for your Market Risk Advisory Committee report. And Rep.
Casten will be in touch shortly for your socially distanced
beer or Zoom beverage. But thanks again for being here today.
Now, we will move to our second panel. We will give our
witnesses a moment to turn on their cameras.
Ms. Castor. Here we go. Great. Welcome to our second panel.
I will go ahead and introduce everyone, and then we will hear
from each of them for 5 minutes.
Dr. Joanna Syroka is Senior Underwriter and Director of New
Markets for Fermat Capital Management, an investment advisory
firm. Prior to joining the firm, she was director of research
and development at African Risk Capacity, Africa's first
sovereign insurance school, where she led the development of
their parametric drought, flood, pandemic, and climate
insurance initiatives. Dr. Syroka also developed a weather risk
management solutions with the World Bank and in the
humanitarian arena with the United Nations World Food Program.
Rich Powell is the Executive Director of ClearPath, whose
mission is to develop an advanced conservative policy that
accelerates clean energy innovation. Rich served as the member
of the 2019 Advisory Committee to the Export-Import Bank of the
United States. He is also on the Atlantic Council's Global
Energy Center's Advisory Group.
Maggie Monast is the Director of Working Lands at the
Environmental Defense Fund. She works with farmers, food
companies, agricultural organizations and others, to create an
agricultural system that drives climate stability, clean water,
and food security. Ms. Monast works to quantify the farm
financial impacts of conservation practice adoption,
collaborates with major corporations to develop sustainability
initiatives, and develops innovative financial incentives to
advance sustainable agriculture.
Welcome to all of you.
With that, Dr. Syroka, you are recognized for 5 minutes to
give a summary of your testimony.
STATEMENTS OF DR. JOANNA SYROKA, SENIOR UNDERWRITER & DIRECTOR
OF NEW MARKETS, FERMAT CAPITAL MANAGEMENT, LLC; MR. RICH
POWELL, EXECUTIVE DIRECTOR, CLEARPATH; AND MS. MAGGIE MONAST,
DIRECTOR, WORKING LANDS, ENVIRONMENTAL DEFENSE FUND
STATEMENT OF DR. JOANNA SYROKA
Dr. Syroka. Thank you, Chair Castor, Ranking Member Graves,
and the members of the Select Committee.
As the chair said, my name is Joanna Syroka. I am a Senior
Underwriter and Director of New Markets at Fermat Capital
Management. Based in Connecticut, Fermat is one of the largest
and most experienced investment managers in insurance-linked
securities, or ILS for short.
ILS are financial investments whose losses are directly
linked to insured loss events, such as wildfires, floods,
hurricanes, and earthquakes. To be clear, investors lose money
when these events occur. ILS effectively convert the global
bond markets into the largest de facto insurance company ever
seen. By doing so, ILS has the potential to absorb catastrophe
risks far better than the traditional insurance industry. The
current market is just over 90 billion in size, but as climate
risks and other risks outpace insurance supply, we foresee
substantial market growth ahead.
Some of the largest institutional investors in the world
invest in ILS, usually through specialist companies like mine.
An ILS investment manager has the duty to watch for even the
slightest change in climate trends and integrate them into
their investment processes. In this way, ILS provides society
with a forward-looking, market-based indication, or price, of
the costs of weather risks and, consequently, climate change.
The U.S. is the cradle of the ILS market. It was born in
the late 1990s, after Hurricane Andrew in 1992 and the
Northridge earthquake in 1994, causing the collapse of
insurance markets in Florida and in California. Since then, ILS
has increasingly helped stabilize the U.S. insurance market,
narrow the insurance protection gap, and reduce insurance costs
for homeowners and businesses. However, as society responds to
risks such as climate change and as new regulations are
introduced to enforce climate-related guidelines, we believe
ILS will play an even greater role in a more climate and
disaster resilient future.
ILS enjoys significant governmental support abroad. They
are already helping emerging economies and other public
entities to manage systemic catastrophe risks with an efficient
pre-event approach, rather than an inefficient post-event
approach to disaster response. Prearranged financing with
timely, reliable, and transparent triggers for funding,
significant funding flows, particularly when embedded in
broader risk management programs, can significantly increase
the efficacy of disaster financing and planning while promoting
resilience for the long run.
In the U.S., ILS is already a core component of residual
homeowner insurance programs in states like Florida, Louisiana,
North Carolina, and Texas. They are helping the State of
California better manage its wildfires. The MTA uses ILS to
cover storm surge losses to the New York City subway system.
And the ILS market is helping the National Flood Insurance
Program back claims after flood disasters without additional
supplementals from Congress. A hallmark of our market has been
innovation. ILS could quite easily be used more broadly in
public-private partnerships to help communities across this
nation recover and rebound in weather catastrophes.
As an ILS investment manager, we see firsthand that global
investors are actively seeking positive ESG investment
opportunities, and we believe that ILS are inherently aligned
with such positive principles. In short, while the need is
great and growing, the capital required to set against this
country's most pressing extreme climate risks is on standby to
being deployed.
To facilitate this, we have the following recommendations
to the Select Committee. Congress can help bring the ILS market
machinery onshore, which would make the market more accessible
to private and public entities who lack the resources to tap
the ILS market offshore. My written testimony contains more
details, but such a step would also create jobs and valuable
know-how in a new and expanding area of financial resilience.
FEMA is already a pioneer in ILS. Congress should adopt key
recommendations on technical assistance from the Select
Committee's majority staff report so that communities,
municipalities, states and others have access to the expertise
they need to follow in FEMA's footsteps.
Congress should also adopt pertinent recommendations on
insurance and innovative risk transfer from the Select
Committee's majority staff report, and consider legislation to
encourage Federal agencies to work with the private sector to
better manage and transfer the climate risks.
We believe these steps would significantly reduce the
burden of catastrophe costs on taxpayers and would help
accelerate resilient recovery in times of disaster, while
creating the insurance tools required to manage the climate and
other risks that we face ahead in the 21st century.
Thank you for the opportunity to testify today, and I look
forward to answering any questions that you may have.
[The statement of Dr. Syroka follows:]
Testimony of Joanna Syroka
Senior Underwriter and Director of New Markets, Fermat Capital
Management, LLC
Before the Select Committee on the Climate Crisis
``Creating a Climate Resilient America: Strengthening the U.S.
Financial System and Expanding Economic Opportunity''
October 1, 2020
Good afternoon, Chair Castor, Ranking Member Graves, and members of
the Select Committee, my name is Joanna Syroka, and I am a senior
underwriter and director of new markets at Fermat Capital Management.
Based in Westport, Connecticut, Fermat is one of the largest and most
experienced investment managers in Insurance-Linked Securities, or ILS
for short.
ILS are financial investments whose losses are directly linked to
insured loss events such as wildfires, floods, hurricanes and
earthquakes. To be clear: investors lose money when these events occur.
ILS are most often used by insurers and reinsurers to transfer
catastrophic risks that stress their balance sheets the most directly
to the capital markets where capacity for such risks is greater.[1]
This frees up capital, allowing insurers to provide more coverage to
the areas that demand it and to support homeowners, businesses and
vital economic activity in all geographies in the United States. As
governments act as the ``insurer of last resort'', many governments and
public entities around the world--including the U.S. federal
government--are also issuing ILS to manage their obligations in times
of disaster. ILS effectively convert the global bond market into the
largest de facto insurance company ever seen. By doing so, they have
the potential to absorb catastrophe risks far better than the
traditional insurance industry. The current ILS market stands at over
US$90 billion in size, but as climate and other risks outpace insurance
supply, we foresee substantial market growth ahead.[2]
Some of the largest institutional investors in the world invest in
ILS, usually through specialists like my company. Our portfolios, like
the ILS market, are predominantly U.S. focused and primarily exposed to
U.S. weather risks, such as hurricanes, floods, tornadoes and
wildfires, as well as earthquakes and other catastrophe risks. As such,
the ILS market--like the insurance and reinsurance markets it
supports--is at the forefront of monitoring changes in weather extremes
and their impact on economies. Unlike long-duration investments like
equities, traditional bonds and real estate, ILS are more short-term in
nature (maturities typically range from one to five years) and can,
therefore, reprice their returns in the relative near term as new
information about the frequency and severity of weather events becomes
available. As a leading manager in this space, we continually monitor
events and check our models and benchmarks for any potential changes in
extreme weather activity, seeking to detect and integrate emerging
climate trends into our investment processes. This ongoing feedback
loop is critical to the functioning of the ILS market, creating a
``climate linker'' market architecture within which ILS can be thought
of as ``climate-indexed floating rate'' investments. In this way,
investors and ILS issuers alike are provided with a forward-looking,
market-based indication--or price--of the costs of weather risks and,
consequently, climate change. The insurance and ILS markets are
uniquely placed to provide this essential price discovery function to
society.
The United States is the cradle of the ILS market. It was born in
the late 1990s after two events--Hurricane Andrew in 1992 in suburban
Miami and the Northridge Earthquake in 1994 in suburban Los Angeles--
caused a near-collapse of the insurance markets in Florida and
California. These disasters created an opportunity for capital market
investors to provide new capital to the insurance sector. Since then,
ILS have had an increasingly important role in helping stabilize the
U.S. insurance market through the sharing of risks across a broader and
deeper capital pool and in narrowing the insurance protection gap by
increasing the available insurance capacity for catastrophe risks. By
providing multi-year protection against events so large that any
traditional reinsurer's solvency would be called into question, ILS
have reduced insurance costs for U.S. homeowners and businesses and
have helped ensure that coverage remains stable nationwide in the
aftermath of a major catastrophe.[3] However, as society responds to
risks such as climate change--by shifting towards a low-carbon economy,
investing in risk mitigation and adaptation measures, and as new
regulations are introduced to enforce climate-related guidelines--we
believe ILS will have an even greater role to play in building a more
climate and disaster-resilient future.
ILS are already helping emerging economies rebound from disasters
quicker and enjoy significant governmental support abroad. They enable
governments and other public entities to manage systemic catastrophe
risks with an efficient, pre-event approach--rather than an
inefficient, post-event approach to disaster response. Pre-arranged
financing with timely, reliable and transparent triggers for funding
flows, when embedded within broader disaster risk management programs
aimed at reducing the impact of disasters on local economies and that
include contingency plans for how communities build back better, can
significantly increase the efficacy of disaster financing and planning,
while promoting resilience for the long-run. For example, the World
Bank has been enabling client countries, such as Chile, Columbia,
Mexico, Peru and the Philippines, to manage their natural catastrophe
risks with catastrophe bonds, the best-known type of ILS, since
2009.[4] These bonds use triggers based upon transparent and objective
parameters of an event, such as the central pressure of a hurricane,
that can unlock capital quickly and efficiently when disaster strikes
to respond to areas in need. The U.K.'s terrorism insurance pool issued
a terrorism risk catastrophe bond in 2019, with the aim of further
distancing Her Majesty's Treasury and the U.K. taxpayer from any
liability in the event of a major claim due to a large terrorism attack
(or attacks).[5]
In the U.S., ILS are already a core component of residual homeowner
insurance programs in states like Florida, Louisiana, North Carolina
and Texas, ensuring they can pay claims after hurricanes and remain
solvent to provide coverage for the next year.[6] They are helping
utility companies in California better manage their wildfire risk and
reduce the risk for the communities they serve.[7] The Metropolitan
Transportation Authority (MTA) uses catastrophe bonds to cover storm
surge losses to the New York City subway system.[8] Catastrophe bonds
are helping the National Flood Insurance Program (NFIP) ensure it can
pay claims after flood disasters without additional supplemental
appropriations from Congress.[9] A hallmark of our market has been
innovation, and there is no reason why ILS could not be used more
broadly in public-private partnerships to help communities across the
nation recover and rebound more quickly from weather catastrophes and
reduce the need for post-disaster federal outlays.
As an ILS investment manager, we see first-hand that global
investors are actively seeking positive Environmental, Social and
Governance (ESG) investment opportunities that support the United
Nations Sustainable Development Goals and we believe that ILS are
inherently aligned with such positive principles. As outlined above, on
the environmental front, ILS provide a market-based pricing mechanism
giving an essential signal of the relative benefits of climate risk
mitigation and adaptation measures to communities, creating a powerful
feedback loop that aligns incentives for better risk management in the
long term. On the social front, ILS are already helping to stabilize
insurance markets, allowing them to support sustainable economic
activity and reduce the economic impact of disasters on citizens. With
respect to governance, ILS enable companies and governmental entities
to manage systemic catastrophe risks with a rational, forward-looking
approach--rather than an inefficient, after-the-fact approach--with
significant multiplier effects for economies and society. For these
reasons, our asset class has received significant attention from
investors who are increasingly considering these qualities in their
investments. In short, while the need for insurance capacity is great
and growing, the capital required to set against this country's most
pressing extreme weather risks is on stand-by to be deployed.
To facilitate this, we have the following recommendations to the
Select Committee:
1. Congress can take measures to help bring the ILS market onshore,
which would make it more accessible to private and public entities who
lack the resources or find it operationally difficult to do business
offshore yet desire to tap the market. Currently, all catastrophe bonds
and ILS are issued offshore in jurisdictions that have favorable
regulatory and tax treatments for the special purpose insurers (SPIs)
that are used to create and issue these securities. In the U.S., these
SPIs are classified and therefore taxed at the federal level as
corporations, making it prohibitively expensive to securitize
catastrophe risks onshore. Allowing a so-called ``pass-through tax
status'' for ILS SPIs would remove this impediment and enable ILS to be
issued onshore. If implemented correctly, such pass-through legislation
would result in a pure gain in revenue to the federal government.
Bringing the market onshore would mean municipalities, states and other
public entities would be freer to cede their risk to the capital
markets and create programs to manage that risk with an efficient, pre-
event approach. Moreover, such a step would also create jobs in the
U.S. with valuable know-how in a new and expanding area of financial
resilience, and generate opportunities in data, science and cutting-
edge technologies in disaster risk mitigation as on-the-ground programs
are created.
2. The Federal Emergency Management Agency (FEMA), through the
NFIP, is already a pioneer in catastrophe bonds. Congress should adopt
key recommendations on technical assistance from the Select Committee's
majority staff report, ``Solving the Climate Crisis: The Congressional
Action Plan for a Clean Energy Economy and a Healthy, Resilient, and
Just America'', so that entities seeking to access the ILS market--such
as communities, municipalities and states--can optimally leverage
existing experience and programs and have access to the expertise they
need to follow in FEMA's footsteps.
3. Congress should also adopt pertinent recommendations on
insurance and innovative risk transfer from the Select Committee's
majority staff report, ``Solving the Climate Crisis: The Congressional
Action Plan for a Clean Energy Economy and a Healthy, Resilient, and
Just America'', including:
Increasing the role of insurance and innovative
finance to support rapid and resilient recovery from disasters.
Strengthening the NFIP by, among other things,
providing community-wide flood insurance.
Directing FEMA to evaluate and report on the use of
innovative risk transfer mechanisms such as parametric
insurance and catastrophe bonds to cover assets that are
eligible for Stafford Act Category E funds.
4. Congress should consider legislation to encourage federal
agencies to work with the private sector to better manage and transfer
climate risk.
We believe these steps would significantly reduce the burden of
catastrophe costs on taxpayers and help accelerate resilient recovery
in times of disaster, while creating the insurance tools required to
manage the climate, and other, risks ahead in the 21st century and
ensuring the nation can finance and support continued economic growth
in all geographies.
Thank you for the opportunity to testify today to the House Select
Committee on the Climate Crisis and I look forward to answering any
questions you may have.
references:
[1] Reinsurers are companies that insure insurance companies.
[2] ILS Annual Report 2020, Aon, September 28, 2020. Available at:
http://thoughtleadership.aonbenfield.com//Documents/
280920_aon_securities_ils_annual_2020_update.pdf
[3] Alternative Capital and Its Impact on Insurance and Reinsurance
Markets, Robert P. Hartwig and James Lynch, Insurance Information
Institute, March 2015. Available online at: https://www.iii.org/sites/
default/files/docs/pdf/paper_alternativecapital_final.pdf. See also:
ILS: ``Taller'' Than You Might Think, John Seo, presented to the
Federal Insurance Office, U.S. Department of the Treasury, November 4,
2015. Available online at: https://home.treasury.gov/system/files/311/
Fermat_Capital_Presentation.pdf
[4] E.g. see World Bank Catastrophe Bond Provides Financial
Protection to Mexico for Earthquakes and Named Storms, World Bank,
March 9, 2020. Available online at: https://www.worldbank.org/en/news/
press-release/2020/03/09/world-bank-catastrophe-bond-provides-
financial-protection-to-mexico-for-earthquakes-and-named-storms
[5] Placed World's First Terrorism Insurance-Linked Security (ILS)
of £75m, Pool Re, 2019. Available online at: https://
www.poolre.co.uk/history/placed-worlds-first-terrorism-insurance-
linked-security-ils-of-75m/
[6] The most recent transaction of this kind was by the Texas
Windstorm Insurance Association in June 2020, see TWIA's New Alamo Re
2020 Cat Bond Doubles in Size to $400m, Artemis, June 1, 2020.
Available at: https://www.artemis.bm/news/twias-new-alamo-re-2020-cat-
bond-doubles-in-size-to-400m/
[7] E.g. Sempra Energy, see Sempra Energy's SD Re 2020-1 Wildfire
Cat Bond May Upsize to $90m, Artemis, July 2, 2020. Available at:
https://www.artemis.bm/news/sempra-energys-sd-re-2020-1-wildfire-cat-
bond-may-upsize-to-90m/
[8] See New York's MTA Sells Storm Bond: Agency Gets Creative in
Disaster Planning as Usual Sources of Insurance Dry Up, Wall Street
Journal, July 31, 2013. Available at: https://www.wsj.com/articles/
SB10001424127887323681904578640401075075198
[9] More information on NFIP's reinsurance program and catastrophe
bond issuances can be found online at: https://www.fema.gov/flood-
insurance/work-with-nfip/reinsurance
Ms. Castor. Thank you very much.
Mr. Powell, you are recognized for 5 minutes.
STATEMENT OF MR. RICH POWELL
Mr. Powell. Good afternoon, Chair Castor, Ranking Member
Graves, and members of the committee. I lead ClearPath. We
advance conservative policies that accelerate clean energy
innovation across all zero-emission resources. An important
note, we receive no industry funding.
We believe this Select Committee plays an important role in
America's response to the global climate challenge. We commend
Chair Castor and Ranking Member Graves for holding this
important hearing on reducing the risks of climate change.
I plan to cover, first, climate change and its economic
risks; second, reducing these risks through global emissions
mitigation and local adaptation; third, the challenges of
changing developing countries' emissions trajectories; fourth,
a strategy for America to lead on solving the global climate
challenge; and fifth, opportunities to build on last Congress'
bipartisan clean innovation record.
Climate change is real. Global industrial activity is the
dominant contributor, and its risks to society merit
significant action at every level of government and private
sector. Earlier this month, as we have heard, a CFTC
subcommittee led by Commissioner Behnam issued a report finding
climate change could pose systemic risks to the U.S. financial
system.
According to NOAA, just 14 extreme weather events in 2018
caused $93.5 billion in damages. The Wharton Risk Center
recently found a federally insured, mortgage-backed securities
account for more than 60 percent of our outstanding mortgage
debt, tripling to $6.7 trillion since 2000. American taxpayers
will inevitably foot this bill, subsidizing the risky choices
of those remaining in harm's way. This system is unsustainable.
Now, how to respond. To start, we can do much to adapt to
climate risk with smarter resilience policies. According to
FEMA, every dollar spent on pre-disaster mitigation saves, on
average, $4. Louisiana's Coastal Protection and Restoration
Authority Master Plan, for example, would spend $950 million in
fiscal year 2021 as part of their 50-year, $50 billion
resilience and restoration plan.
On mitigation, the science of climate change is harsh. The
global atmosphere responds the same way to every ton of
greenhouse gases. A molecule of CO2 from Birmingham has the
same effect as one from Beijing. No country can single-handedly
mitigate global climate risk. And every country must take care,
lest its policies risk domestic economic damage with little
climate outside. Or even worse, so-called leakage of their
energy intensive industries as well, increasing emissions.
These realities, however, are no excuse for inaction. Rather,
they simply require us to design U.S. policy responses heed
toward global emission reduction; a massive innovation
challenge.
Let's take a look around the world. Despite tremendous
progress, India, for example, still has 178 million people
without reliable electricity. Why? Well, in 2018, the
International Energy Agency found that when Indians could
access electricity, it was on average twice as expensive as in
the U.S. The share of global energy supplied by clean sources
have barely increased since 2005. In other words, clean
development is only just keeping up with economic development.
Clean is not gaining ground. Clean technology systems must come
to represent better, cheaper alternatives that are reliable 24/
7, 365, so developing nations consistently choose them.
If America does not provide the world with affordable and
reliable clean energy, developing countries will continue
reliance on our adversaries, China and Russia. In addition to
its major build of new domestic coal, China is financing and
building nearly 100 gigawatts more in other developing
countries through Belt and Road, all without carbon capture,
locking in emissions for decades.
To meet this challenge, we must greatly increase pace and
ambition. There are four legs to success. First, we must
innovate. Major technology demonstrations would prove the
viability of a portfolio of 24/7 clean technologies at full
scale, covering everything from grid-scale storage and enhanced
geothermal to carbon capture and advanced nuclear.
Second, we must remove unnecessary regulatory hurdles
needlessly slowing down projects. This includes new source
review reforms, as Representative Griffith has recommended, and
the processes around NEPA. Ranking Member Graves' BUILDER Act,
H.R. 8333, for example, introduced last week, would remove
barriers and accelerate the deployment of clean energy
technologies.
Third, we must build enough of this new technology to bring
down costs. Smart incentives help innovators learn by doing.
Delivering the technologies here in the 2020s, the developing
countries can deploy in the thirties and forties.
Fourth and finally, we must export the proven technology to
new clean energy markets. Global energy trends will decline
when we have products and export support ready for rapidly
growing countries like Nigeria to buy. No country will use a
single clean power technology. Every country will need to find
the right mix, given its national circumstances, resource
endowments, and preexisting industry.
We hope policymakers will work towards a bipartisan
solution based on the principle of more innovation and less
regulation for clean technologies before the end of this
Congress. There are a number of House-passed bills that, if
appropriately combined with pending Senate legislation, will
create moonshots for E-clean technology. To address climate
change, we must develop every tool to achieve clean, reliable,
affordable, and exportable energy.
Thank you again for this opportunity, and I look forward to
the discussion.
[The statement of Mr. Powell follows:]
Testimony of Richard J. Powell
Executive Director, ClearPath
House Select Committee on the Climate Crisis
Creating a Climate Resilient America: Strengthening the U.S. Financial
System and Expanding Economic Opportunity
Good afternoon Chair Castor, Ranking Member Graves and members of
the Committee. My name is Rich Powell, and I am the Executive Director
of ClearPath.
ClearPath is a 501(c)3 organization whose mission is to develop and
advance conservative policies that accelerate clean energy innovation.
We support solutions that promote a wide array of clean energy
technologies--including next-generation nuclear, hydropower, fossil
fuels with carbon capture and grid-scale energy storage. Our core
mission advocates markets over mandates and bolstering technological
innovation while easing regulatory bottlenecks. ClearPath provides
education and analysis to policymakers, collaborates with relevant
industry partners to inform our independent research and policy
development, and supports mission-aligned grantees. An important note:
we receive zero funding from industry.
We believe this Select Committee plays an important role in
America's response to the global climate challenge. I commend Chair
Castor and Ranking Member Graves for holding this important hearing on
reducing the risks of climate change.
With this in mind, I will discuss a few topics today to help
achieve clean, reliable, affordable and exportable energy in the U.S.:
First, the reality of climate change and its risks
to our economy.
Second, how the nature of these risks call for
global emissions mitigation and local climate adaptation.
Third, the realities and challenges we face on the
global level due to the appetite for energy and new industrial
activity of developing countries.
Fourth, a strategy going forward for America to lead
on solving the climate challenge.
Fifth, opportunities to build on last Congress'
bipartisan clean innovation record to improve clean energy's
competitiveness globally.
1. Climate change risks to the U.S. economy and financial system
First, the elephant in the room: Climate change is real, industrial
activity around the globe is the dominant contributor, and the
challenge it poses to society merits significant action at every level
of government and the private sector. It is too important to be a
partisan punching bag. Climate change deserves a pragmatic and
technology-inclusive agenda to make the global clean energy transition
cheaper and faster.
Earlier this month, the Commodity Futures Trading Commission issued
a report, Managing Climate Risk in the U.S. Financial System, that
finds climate change could pose systemic risks to the U.S. financial
system.\1\ While it notes that significant uncertainty remains in the
climate projections and their potential effects on our financial
system, it argues that prudent economic management calls for ``err[ing]
on the side of caution if we are to maintain the relative stability and
proper functioning of our market economies.''
---------------------------------------------------------------------------
\1\ Commodity Futures Trading Commission (CFTC), ``Managing Climate
Risk in the U.S. Financial System'' (Forward, XIX)
---------------------------------------------------------------------------
For example, analysis from the Risk Center at the Wharton School
recently demonstrated how the federal mortgage finance system will face
multiple challenges due to climate risks. According to Wharton,
mortgage-backed securities insured by the federal government through
Fannie Mae, Freddie Mac, or FHA/VA programs account for more than 60
percent of the outstanding residential mortgage debt in the United
States, totaling $6.7 trillion.\2\ This is up from $2.5 trillion in
2000.
---------------------------------------------------------------------------
\2\ Wharton, University of Pennsylvania, ``Can the Federal Mortgage
Finance System Help Manage Climate Risk?''
---------------------------------------------------------------------------
According to the National Oceanic and Atmospheric Administration
(NOAA), this accumulation of financial risk is occuring in the face of
14 individual weather and climate events doing at least $1 billion in
damage in 2018, totaling $93.5 billion in total damages.\3\
Additionally, a 2017 report by the Inspector General found that only 42
percent of the Federal Emergency Management Agency's (FEMA) flood maps
correctly identified flooding risk at this point.
---------------------------------------------------------------------------
\3\ National Oceanic and Atmospheric Administration, ``Billion-
Dollar Weather and Climate Disasters: Events''
---------------------------------------------------------------------------
In some jurisdictions prone to flooding, exacerbated by sea level
rise, private insurers have already largely withdrawn leaving the
public options--either the National Flood Insurance Program or FEMA
emergency spending, as an ever growing public liability.\4\
---------------------------------------------------------------------------
\4\ Amine Ouazad, Matthew E. Kahn, ``Mortgage Finance in the Face
of Rising Climate Risk''
---------------------------------------------------------------------------
This trend will likely continue to worsen. As climate-related
exposure continues to increase, those impacts will be felt in
securities backed by the federal government, with higher costs passed
on to Americans as a result. This also subsidizes the risky choices of
those remaining in harm's way. In other parts of the country, excessive
regulation of home insurance is leading to unsustainable mandates to
maintain coverage of fire risk, for example, impeding accurate pricing
and risking a further withdrawal of private insurers and an inevitable
demand that more federal dollars subsidize the vulnerable. This system
is unsustainable.
2. Climate risks call for global emissions mitigation and local
adaptation
The harsh reality of global climate change is that the global
atmosphere responds the same way to a ton of greenhouse gases
regardless from where it is emitted. A ton from the United States today
has an identical effect as a ton from Nigeria, India, Indonesia, and
China today, or in the years to come. This makes combatting the risks
from climate change necessarily a global issue. No country can single-
handedly mitigate global climate risk. Indeed, the United States, while
a major historical contributor, now emits 15 percent of global
emissions, and our share is dropping as those of rapidly developing
countries rise.
This must never be taken as an excuse for inaction. Rather, the key
to mitigating the risks of global climate change is designing U.S.
policy responses keyed towards global emissions reductions--a massive
innovation challenge discussed below. As well, the U.S. must be wary
not to drive emitting industries across our borders and to other
jurisdictions in developing countries with cheaper inputs and lax
environmental controls--a phenomenon known as emissions leakage that
risks increasing global emissions. Nor should we risk policies that are
so harmful to our own markets and financial systems that they do more
harm than good to our economy.
Even as we pursue a strategy of global climate risk mitigation via
clean technology diffusion, state and local jurisdictions can do much
to lessen climate risk with smarter adaptation and resilience policy.
Since 1980, the United States has spent $1.75 trillion in disaster
recovery from 258 ``billion-dollar events.'' From 2014 to 2018, the
United States saw an average of 13 billion-dollar disasters every year.
This is all deficit spending. If we don't better prepare, we will
further increase deficit spending. According to FEMA, every $1 spent on
pre-disaster mitigation saves on average $4.
The current, tragic wildfires in California, and some of the
proposed policy responses, present a potential example of how these
mitigation and adaptation priorities can be conflated and risk doing
more harm than good. While a global response to climate change will
eventually reduce the risk of uncontrollable wildfires in California,
the absolute near-term priority in the state must be on better climate
resilience and adaptation policy--a huge step up in forest and
vegetation management--if large portions of the state are to remain
livable. Calls for tripling down on mitigation policy within
California's borders as a near-term fire risk reducer, as some have
suggested,\5\ risk providing citizens with false hope and distracting
from the essential local task of reducing the massive accumulated fuel
load ready to burn across the West.
---------------------------------------------------------------------------
\5\ California Governor Gavin Newsom held a press conference,
9.11.20
---------------------------------------------------------------------------
Louisiana's Coastal Protection and Restoration Authority master
plan is a great example of long-term resilience efforts at the local
level. In Fiscal Year 2021, they plan to spend more than $950 million
as part of their 50-year, $50 billion master plan for hurricane surge
risk reduction and coastal restoration projects.\6\
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\6\ Louisiana Coastal Protection and Restoration Authority
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3. Global energy realities
To have a debate about climate change rooted in political and
technical realism, as well as economic competitiveness, we need to
understand the needs of the rest of the world. Developing countries
have an insatiable energy appetite.
As populations and economies grow, they are demanding more and more
affordable energy options. Let's take a look around the globe--hundreds
of millions of people in Asia and Africa continue to lack basic
necessities for human development and public health linked to clean
electricity, like lights in their hospitals and clean air to breathe.
India has some of the dirtiest air and one of the largest populations
without reliable electricity access in the world. Despite tremendous
progress, India still has 178 million people without reliable
electricity and is home to 22 of the world's 30 most polluted cities.
Why does so much of India lack reliable electricity? Ultimately, it
costs too much. In 2018, the International Energy Agency (IEA) found
when Indians could access electricity, it was on average twice as
expensive as in the United States, adjusted for purchasing power. And
that's for electricity far dirtier than U.S. electricity. In the early
days of the coronavirus lockdowns, India relied on coal for 72 percent
of their electricity, while the U.S. was down to 17 percent--and U.S.
coal plants have far more modern environmental controls. This
illustrates the significant hurdle we need to achieve on affordability
and performance for new zero-emissions technologies.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The current energy choices available to developing nations are
simply not up to the task of rapid global decarbonization. Despite
significant global renewables deployment, emissions continue to rise.
The share of global energy supplied by clean sources has barely
increased since 2005. In other words, clean development is only just
keeping up with economic development; clean is not gaining ground.
Clean technology must come to represent a better, cheaper alternative
that is reliable 24/7/365 so developing nations consistently choose it
over higher-emitting options. We must remember that developing nations
are building energy systems, not just individual plants, and must take
into account the overall system costs of new energy sources. For
example, a reliable energy system based on variable wind and solar also
must incorporate the costs of additional transmission to load centers,
along with either over-build in the generation to account for
variability given their capacity factors, or short and long duration
storage to smooth out that variability, or flexible, usually emitting,
back-up generators which increase emissions. All of these add to the
costs of a system.
It's also unlikely that this story will change any time soon unless
new clean technologies become market competitive. China built new coal
plants roughly 20 percent the size of the entire U.S. coal fleet last
year. Despite China's recent net-zero pledge, they continue to
greenlight dozens of new coal power plants without carbon capture
today, which will `lock in' emissions for decades to come.\7\ China's
climate problem is our climate problem, just like their virus problem
became our virus problem.
---------------------------------------------------------------------------
\7\ Institute for Energy Economics & Financial Analysis, ``China at
a Crossroads: Continued Support for Coal Power Erodes Country's Clean
Energy Leadership''
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If America does not provide the rest of the world with affordable
and reliable clean energy technologies, developing countries will turn
to our adversaries, partnering with countries like China and Russia,
who view the spread of their technology as a way to expand their power
while weakening the United States. In other words, by failing to
develop affordable clean energy sources of all kinds, we not only fail
to solve the climate issues at hand but also threaten our own national
security and geopolitical position.
China and Russia have gained the upper hand in energy exports by
leveraging state-owned enterprises to achieve their economic and
political interests. The aforementioned Belt and Road initiative that
China is pursuing relies heavily on state-owned enterprises to achieve
its goals. By project value, as of last October, 70 percent of Belt and
Road projects were contracted to state-owned enterprises. These state-
owned enterprises seek to achieve the strategic objectives of the
initiative: to use economics to promote politics and to combine
politics and economics.\8\ They seek to achieve these objectives with
more than just financial backing from China. The Chinese government
offers policy, performance evaluation, and risk management and analysis
to these companies to make them more effective.
---------------------------------------------------------------------------
\8\ The Lowy Institute, ``China's Belt and Road Initiative, from
the inside looking out''
---------------------------------------------------------------------------
As for Russia, they also utilize state-owned enterprises to achieve
their goals. Their state-owned nuclear company, Rosatom, reports that
at least 33 plants are currently planned for development. Whereas the
United States historically led the world in peaceful and safe nuclear
technology exports, Russia has attempted to corner the global market,
positioning themselves as the leading exporter with more than a dozen
plants currently being built in countries like Turkey, Bangladesh,
India and Hungary.\9\ China is close behind Russia, having increased
nuclear exports under the belief that more nuclear energy proliferation
will make the world more peaceful while also supporting their economic
goals.\10\
---------------------------------------------------------------------------
\9\ The Economist, ``Russia leads the world at nuclear-reactor
exports''
\10\ Carnegie Endowment for International Peace, ``The Future of
Nuclear Power in China: Introduction''
---------------------------------------------------------------------------
We should also note that our global competitors and their state
owned enterprises (who control roughly 90% of known oil and gas
reserves) do not fall within the same voluntary corporate governance
regimes currently being constructed by the growing number of U.S. and
European investors with an ESG focus. While those regimes can helpfully
encourage investment in cleaner resources and consideration of the
physical risks of climate change in business planning, we should take
care that they do not unduly disadvantage or re-direct investment out
of higher efficiency, cleaner operating American companies and into the
hands of their sovereign-owned global competitors who are subjected to
little environmental scrutiny or regulation. For example, the National
Energy Technology Laboratory study has found that Russian natural gas
exported to Europe has lifecycle greenhouse gas emissions over 40%
higher than U.S. liquified natural exported to Europe. Policies that
give Gazprom a competitive advantage over U.S. LNG are policies that
will result in higher global emissions.\11\
---------------------------------------------------------------------------
\11\ Department of Energy, National Energy Technology Laboratory,
``Life Cycle Greenhouse Gas Perspective on Exporting Liquefied Natural
Gas from the United States''
---------------------------------------------------------------------------
These examples illustrate both the economic potential and the
pitfalls of inaction present in this debate. The markets America could
serve are vast, and the trade benefits we can experience are huge, if
we are the first to develop truly scalable clean energy solutions and
craft a cohesive plan for international deployment assistance. More
broadly, continuing an innovation-focused approach to American clean
energy dominance will cement our geopolitical gains from the shale
revolution, ensuring we continue as the global energy superpower
throughout the 21st century.
4. A roadmap to global climate change mitigation
Given the scale of the climate challenge, we need to greatly
increase the pace and ambition of our efforts. ClearPath has laid out
four legs to success.
First, we must innovate. That means developing clean technologies
the world wants to buy that give America a competitive advantage. Big
energy projects can't be done in someone's basement with a small angel
investor like a new food delivery app. And we must drive progress with
public investments in close partnership with the private sector, with
very clear accountability at DOE to produce huge cost and performance
improvements.
Second, we must limit excessive regulatory hurdles that needlessly
slow down clean energy workers. Members of this Committee are
supporting important reforms to the National Environmental Protection
Act (NEPA), for example. The efficient permitting of projects is
essential to effectively using scant taxpayer resources and to scaling
clean energy deployment rapidly. We can only build clean energy
technologies and put more energy workers back on the job as fast as we
can permit the projects.
Ranking Member Graves' BUILDER Act (H.R. 8333), for example,
introduced last week, would remove barriers and accelerate the
deployment of clean energy technologies.
Third, we must demonstrate how the technology works. Let's work
with the utility companies and private sector making bold net-zero
emissions commitments, not against them. Congress is working on
authorizing bills to cost share federal demonstration programs,
incentivize demonstrating new technology via tax credits, and smooth
the regulatory path to deploying these at scale, driving affordability.
America's largest electric utilities--with more than 22 investor-
owned utilities setting net zero by 2050 goals--include North Carolina-
based Duke Energy and Georgia-based Southern Company, which operates
the largest grid in the country. According to the Smart Electric Power
Alliance, 68 percent of all electricity customer accounts in the
country are now served by a utility with a significant carbon emissions
reduction goal, and 19 of the 48 companies setting goals are for net-
zero or carbon-free power by 2050.\12\ These electricity producers have
been virtually uniform in stating that the technology does not exist
today to achieve these goals affordably and reliably, and that Federal
policy should focus on identifying and demonstrating affordable,
flexible clean energy resources like carbon capture, advanced nuclear,
grid scale storage, geothermal and clean hydrogen--along with carbon
dioxide removal technologies like direct air capture that could allow
them to offset any remaining fossil plants' emissions by 2050.
---------------------------------------------------------------------------
\12\ Smart Electric Power Alliance, ``Utilities' path to a carbon-
free energy system by 2050''
---------------------------------------------------------------------------
Corporate commitments go well beyond the energy industry. Walmart's
``Project Gigaton'' is aimed at reducing 1 gigaton of greenhouse gas
emissions from their supply chain by 2030 and going carbon neutral by
2040. Microsoft has committed to reducing its emissions to zero--and
then some--promising to remove all the emissions it has ever created
over its lifetime. These commitments share a need for bold new
technology.
Fourth, we must export the proven technology and create new clean
energy markets. Everything we are innovating and demonstrating must not
only have a niche in our own energy sector, but also apply to countries
like India, Tanzania or Indonesia that are growing exponentially--and
consider what they would be willing and able to buy from us. In turn,
we must carefully avoid near-term policies that lock in exclusive
investments towards immediately available, higher cost resources
because doing so will divert resources from the solutions that are
exportable.
America has several levers to ensure our technology offerings are
competitive with countries who do not share our interests or values.
These include engagement with the international community in financing
like the U.S. International Development Finance Corporation (DFC)--
created by the Better Utilization of Investments Leading to Development
(BUILD) Act of 2018 from the Overseas Private Investment Corporation
(OPIC)--and the Export Import Bank, along with bilateral and
multilateral engagement on clean energy exports and technology transfer
in forums like the Clean Energy Ministerial.
For the past decade, the United States has ceded leadership on
international energy development to China and Russia, threatening the
climate, our national security and American economic growth. However,
on July 23, the U.S. took a massive step towards reclaiming our role as
the primary exporter of vital clean energy technologies by lifting the
nuclear financing moratorium at the DFC. Financing nuclear projects
will open the door for U.S. advanced nuclear technologies to lead the
development of clean energy for emerging economies.
Similarly, America needs to work to ensure that restrictions on
clean energy projects do not exist at international organizations we
participate in like the World Bank. Finally, the continued
authorization of the Export Import Bank is key to ensuring the export
of energy technologies internationally.
5. Near-term bipartisan policy opportunities to change global emissions
The 115th Congress did not receive appropriate credit for boosting
low-carbon technologies. The broadly bipartisan agenda enhanced
critical incentives for carbon capture, renewables and advanced
nuclear. It invested in the U.S. Department of Energy (DOE) research
and development (R&D) at record levels, and it reformed regulations to
accelerate the licensing of both advanced nuclear reactors and
hydropower. The 45Q tax incentive for carbon capture and storage
technology is a perfect example--it was supported by a vast bipartisan
coalition from environmental organizations to organized labor to
utilities to coal companies. Notably, seven national unions recently
collectively re-emphasized the importance of including carbon capture
and nuclear in any national clean energy policy. Lastly, the creation
of the Development Finance Corporation through the BUILD Act greatly
improved the prospects for American clean technologies internationally.
This Congress has a great opportunity before you to pass bipartisan
clean energy innovation legislation. The very bipartisan Senate
American Energy Innovation Act (S. 2657) may well pass the floor of the
Senate this week. The Senate bill starts a suite of moonshots for key
clean innovation technologies we'll need to decarbonize affordably and
reliably--including 17 major new technology demonstrations by 2025 of
grid scale storage technologies, enhanced geothermal systems, fossil
fuels with carbon capture, and advanced nuclear reactors. This could
set up a potential conference with a number of the bipartisan measures
either passed out of or under consideration in the House Science, Space
and Technology committee and the Energy and Commerce committee, such
as:
H.R. 2986, the Better Energy Storage Technology Act,
which would facilitate the research, development, and
demonstration of next-generation grid-scale energy storage
systems.
H.R. 3306, the Nuclear Energy Leadership Act, which
would expand nuclear research, development, demonstration, and
commercialization efforts at the Department of Energy.
H.R. 1760, the Advanced Nuclear Fuel Availability
Act, which ensures that advanced fuel is available for the next
generation of nuclear reactors.
H.R. 3607, the Fossil Energy Research and
Development Act, which would reauthorize and expand fossil
energy related R&D and establish an innovative new ``Climate
Solutions Challenges'' prize competition at DOE.
H.R. 4091, the ARPA-E Reauthorization Act of 2019,
which would extend and expand ARPA-E support for transformative
energy technologies.
H.R. 4230, the Clean Industrial Technology Act,
which would establish an emissions- reduction technology
program to reduce industrial sector greenhouse gas emissions.
H.R. 5374, the Advanced Geothermal Innovation
Leadership Act, which would support R&D in advanced geothermal
energy resources.
H.R. 5428, the Grid Modernization Research and
Development Act, which would authorize a broad range of R&D
activities to enhance the resilience and readiness of the
electric grid for a low-carbon future.
H.R. 6084, the Water Power Research and Development
Act, which would provide a program at DOE for the research,
development, demonstration, and commercialization of water
power technologies.
H.R. 3597, the Solar Energy Research and Development
Act, which would accelerate the next generation of solar energy
technologies by expanding DOE efforts to improve the capacity,
efficiency, manufacturing, reliability, and affordability of
solar energy.
H.R. 3609, the Wind Energy Research and Development
Act, which would extend and expand the wind energy technology,
research, development and testing program at DOE.
We hope policymakers will work towards a bipartisan solution based
on the principle of more innovation and less regulation for clean
technologies before the end of this Congress.
Major, lasting energy and environmental policy has nearly always
been bipartisan on passage. We believe climate policy that sustainably
solves the global challenge cannot be done in a partisan manner.
Bipartisan cooperation on climate change is the only chance our nation
has if it is going to play a significant role in the global solution.
To address a massive global challenge like climate change, we must
develop every tool to achieve clean, reliable, affordable and
exportable energy. No country will use a single clean power
technology--every country will need to find the right mix given its
national circumstances, resource endowments and pre-existing industry.
Thank you again for this opportunity, and I look forward to the
discussion.
Ms. Castor. Thank you very much.
Ms. Monast, you are recognized for 5 minutes.
STATEMENT OF MS. MAGGIE MONAST
Ms. Monast. Thank you, Chairwoman Castor, Ranking Member
Graves, and all the members of this committee, for the
opportunity to provide testimony today. I am honored to share
with you my perspective on the role of the financial system in
supporting climate resilient agriculture.
I am Director of Working Lands for Environmental Defense
Fund, an international nonprofit environmental organization. My
EDF colleague, Nat Keohane, participated on the CFTC's Climate-
Related Market Risk Subcommittee. So I would also like to thank
Commissioner Behnam for his leadership in that process.
At EDF, we are proud to collaborate with farmers, farmer
organizations, land grant universities, and businesses
throughout the supply chain to ensure a sustainable and
profitable future for U.S agriculture. Our farmer advisory
board informs all our agriculture work and was instrumental in
shaping my research into the agricultural financial system.
Farmers are on the front lines of climate change. In 2020
alone, we have seen ample evidence of these impacts, including
destructive storms in the Midwest, hurricanes along our coasts,
and wildfires and smoke in the West. I have personally
witnessed the damage while visiting farmers in my home state of
North Carolina after multiple hurricanes over the past 5 years.
Despite these challenges, agriculture has a tremendous ability
to build resilience and be part of climate solutions. However,
farmers can't do this alone.
In my research on the financial value and barriers to
climate resilient agriculture, it became obvious that the role
of agricultural lenders cannot be ignored. Like any business, a
farm's success relies on access to finance. Farmers go to
agricultural lenders for a variety of lending products,
including loans for land, equipment, and operating expenses.
Farmer and lender relationships often span many years, and are
rooted in a shared community.
Aside from the farmer, him or herself, the agriculture
lender has the most holistic view of a farmer's financial
health. However, climate risk remains a blind spot for lenders,
which creates vulnerabilities for their businesses and for
farmer clients. Following severe flooding in the spring of
2019, the Midwest region's agricultural loan portfolio reported
the highest level of major or severe repayment problems in 20
years.
As climate talks continue, a credit-stress agricultural
lending system could decrease farmers' access to affordable
credit and increase their difficulty in recovering from severe
weather events. For small farmers and farmers of color, this
runs the risk of further worsening historical inequities and
access to credit.
While the broader financial sector has made progress in
assessing climate risk, agricultural lenders are lagging. The
longer the agriculture finance sector waits to assess and
address climate risks, the greater the likely severity of
economic consequences for lenders and their farmer clients.
In addition to climate risk assessment, we also need
financial tools that support farmers in their transition to
practices that build resilience. EDF and many others have
analyzed farmer budgets showing how climate resilient farming
practices, like cover crops, no-till, nutrient management, and
diverse crop rotation, can deliver positive returns on
investment over the long term in the form of cost reduction,
more resilient crop yields, and diversified revenue sources.
They also can improve water quality, reduce greenhouse gas
emissions, sequester carbon, and support biodiversity.
However, farmers also face short-term barriers to
conservation adoption, including costs, risk, and time.
Agricultural lenders can create loan products that align with
the financial needs of farmers to adopt practices that improve
climate resilience. Ultimately, this will benefit both farmers
and the overall risk of a lender's portfolio.
So how do we move forward from here? First, we must do
better in connecting the data on climate resilient agriculture
with the information needed by farmers, lenders, and crop
insurers to make decisions and assess risks. Second, we must
look carefully at the intersection of farmer equity and climate
resilience in agriculture and finance. And, third, we must spur
innovation in this area to further the development of financial
products to support farmers in building resilience.
A major shift in the agricultural finance sector's approach
to climate risk and resilience is overdue.
Thank you very much for this opportunity to testify, and I
look forward to answering your questions.
[The statement of Ms. Monast follows:]
Testimony of Maggie Monast
Director of Working Lands
Environmental Defense Fund
October 1, 2020
House Select Committee on the Climate Crisis
Thank you, Chairwoman Castor, Ranking Member Graves, and all the
Members of this Committee for the opportunity to provide testimony. I
am honored to share with you my perspective on the role of the
financial system in supporting climate resilient agriculture.
At EDF, we are proud to collaborate with farmers, farmer
organizations, land grant universities, and companies throughout the
supply chain to advance climate resilient agriculture. Our farmer
advisory board informs all our agriculture work and was instrumental in
shaping my research into the agricultural financial system.
To start, it's important to note that, like any business, a farm's
success relies on access to finance. Farmers go to agricultural lenders
for a variety of lending products, including real estate loans,
equipment loans and operating loans. Farmer and lender relationships
often span many years and are rooted in a shared community. Aside from
the farmer him- or herself, the agricultural lender has the most
holistic view of a farm's financial health. If our goal is to decrease
the risk of financial harm to America's agriculture sector caused by
climate change, the role of agricultural lenders cannot be ignored.
U.S. agriculture is financed by a few different categories of
credit providers. The Farm Credit System is a government-sponsored
enterprise established to enhance the flow of credit to U.S.
agriculture. Farm Credit accounts for 41% of farm debt and is the
largest lender for farm real estate.\1\ Commercial banks are the other
primary category of agricultural lenders, holding slightly more than
the Farm Credit System with 42% of total farm debt, and the most farm
operating loans.\2\ This segment includes large, diversified banks,
financial divisions of major agriculture companies, as well as many
regional and community banks. Finally, the Farm Service Agency (FSA),
part of the U.S. Department of Agriculture, issues direct loans to
farmers who cannot qualify for other sources of credit and guarantees
the repayment of loans made by other lenders. FSA represents a small
portion of overall farm debt, but it is also a lender of first
opportunity because it targets loans or reserves funds for farmers
defined as ``socially disadvantaged'' due to their race, gender and/or
ethnicity.\3\
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\1\ Monke, Jim. (2018, March 26). Agricultural Credit: Institutions
and Issues. Congressional Research Service. Retrieved July 2020 from:
https://fas.org/sgp/crs/misc/RS21977.pdf.
\2\ Ibid.
\3\ Ibid.
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A proactive approach to managing climate risk includes both climate
risk assessment by agricultural lending institutions as well as
programs designed to support farmer adoption of resilient practices.
There are substantial opportunities for agricultural lenders to support
their farmer clients in building climate resilience into their farming
operation. At scale, this would also reduce overall climate risk to the
agricultural lending sector. It is the combination of these two
approaches--assessing and mitigating climate risk at the lending
institution level, while supporting agriculture to become more
resilient--that will be required to successfully navigate the
challenges posed to agriculture and agricultural lending institutions
by climate change.
Climate Risk and Agriculture Financial Markets
Farmers are on the front lines of a changing climate. The Fourth
National Climate Assessment, a congressionally mandated report by the
U.S. Global Change Research Program, describes how increased
temperatures, more frequent droughts and extreme precipitation events
threaten crop productivity across the United States.\4\ In 2020 alone,
we have seen ample evidence of these impacts, including destructive
storms in the Midwest, hurricanes along the coast, and wildfires and
smoke in the West. I have personally witnessed the damage while
visiting farmers in my home state of North Carolina after several
hurricanes devastated the Coastal Plain agricultural region in the past
five years. In addition to intensifying natural disasters, farmers must
also contend with increased variability in temperature and rainfall, as
well as changes in natural cycles such as pollination and pest
suppression.\5\ These challenges, compounded by poor economic
conditions, trade disruptions, and the Covid-19 pandemic have caused
the farm economy to experience its worst downturn since 2001.\6\
---------------------------------------------------------------------------
\4\ USGCRP, 2018: Impacts, Risks, and Adaptation in the United
States: Fourth National Climate Assessment, Volume II [Reidmiller,
D.R., C.W. Avery, D.R. Easterling, K.E. Kunkel, K.L.M. Lewis, T.K.
Maycock, and B.C. Stewart (eds.)]. U.S. Global Change Research Program,
Washington, DC, USA, 1515 pp. doi: 10.7930/NCA4.2018.
\5\ Ibid.
\6\ U.S. Department of Agriculture Economic Research Service. 2020
Farm Sector Income Forecast. (2020, February 05). Retrieved July 2020,
from https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-
finances/farm-sector-income-forecast/.
---------------------------------------------------------------------------
A recent report from the Commodity Futures Trading Commission
(CFTC) Climate-Related Market Risk Subcommittee and my own research at
EDF make it clear that climate change poses severe risks to both
farmers and the financial system that finances and insures agriculture
in the U.S., including agricultural lending and crop insurance.
However, there are also opportunities for the agricultural sector to
incorporate farming practices that build resilience, reduce risk and
provide multiple environmental benefits. This committee underscored
those opportunities in its Majority Staff Report, Solving the Climate
Crisis: The Congressional Action Plan for a Clean Energy Economy and a
Healthy, Resilient, and Just America. Two building blocks of the report
focus on agricultural lending and crop insurance, offering a valuable
path forward for Congress on these topics.
The report released last month by the Commodity Futures Trading
Commission (CFTC) Climate-Related Market Risk Subcommittee, which
included input from my EDF colleague Nat Keohane, deftly links the
physical risks of climate change to financial market risks across the
U.S. economy. The report has a significant focus on the agriculture
sector and describes how climate change poses threats to both farmers
and their finance providers, including agricultural lenders. Nearly
half of all agricultural loans are held by lenders with at least one-
quarter of their portfolio concentrated in farm-related areas, such as
operating loans or real estate loans. Many of these lenders also have
correlated risks because of loan concentrations in particular
geographies or related agricultural businesses. Following severe
flooding in the spring of 2019, lenders in the Midwest reported to the
Federal Reserve Bank of Chicago that 70% of their borrowers were
moderately or severely affected by extreme weather events. That year,
the portion of the region's agricultural loan portfolio reported as
having ``major'' or ``severe'' repayment problems hit the highest level
in 20 years.\7\
---------------------------------------------------------------------------
\7\ Climate-Related Market Risk Subcommittee, Market Risk Advisory
Committee of the U.S. Commodity Futures Trading Commission. (2020).
``Managing Climate Risk in the U.S. Financial System.'' Retrieved from:
https://www.cftc.gov/PressRoom/PressReleases/8234-20.
---------------------------------------------------------------------------
The CFTC Subcommittee report highlighted the possibility that
climate-related risks may well produce ``sub-systemic'' shocks, which
are defined as those that affect financial markets or institutions, or
a particular sector, asset class or region, but without threatening the
stability of the financial system as a whole. Agriculture, as a sector
that is particularly vulnerable to climate change, is at risk of sub-
systemic shocks to its financial institutions. A credit-stressed
agricultural lending system would decrease farmers' access to
affordable credit and increase the difficulty in recovering from
climate-related shocks.\8\
---------------------------------------------------------------------------
\8\ Ibid.
---------------------------------------------------------------------------
Crop insurance is an important shock absorber for farmers and their
lenders, but it is not sufficient to protect farmers, lenders or the
broader agricultural economy from climate risk over the long-term. The
U.S. Department of Agriculture's Economic Research Service estimates
that without farmer adaptation to climate change, the cost of the
Federal Crop Insurance Program could increase by nearly 40% in the
second half of this century.\9\ The CFTC Subcommittee report notes that
a key challenge will be the future capacity of the U.S. government to
provide actuarially sound crop insurance, based on best available data,
to support changes in underwriting and pricing attributable to climate
change and natural variability.\10\ In addition, while insurance
coverage is currently high for the major field crops and 75% of large
farms participate in Federal Crop Insurance, only 15% of all U.S. farms
have crop insurance.\11\ This leaves the majority of U.S. farms and
their production left unprotected by crop insurance and vulnerable to
weather shocks. This vulnerability can affect the entire value chain,
including the lenders that finance it.
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\9\ Crane-Droesch, Andrew et al. (2019, July). Climate change and
agricultural risk management into the 21st century. U.S. Department of
Agriculture Economic Research Service. Retrieved from: https://
www.ers.usda.gov/webdocs/publications/93547/err-266.pdf?v=9932.1.
\10\ Climate-Related Market Risk Subcommittee, Market Risk Advisory
Committee of the U.S. Commodity Futures Trading Commission. (2020).
\11\ U.S. Department of Agriculture Economic Research Service.
(2017, December). America's Diverse Family Farms. Retrieved from:
https://www.ers.usda.gov/webdocs/publications/86198/eib-185.pdf.
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There are encouraging signs that the broader financial sector is
moving to address climate risk. A 2019 survey of 20 banks and seven
other financial institutions found that more than half of major
financial institutions now take a strategic approach to climate
risk.\12\ However, research and interviews I conducted with
agricultural lending institutions indicate that the U.S. agricultural
lending sector currenting lags in assessing climate risk and
incorporating it into risk mitigation strategies--as evidenced by
lenders citing their largest risks as commodity prices, production
costs, farmland values and global market issues.\13\ Most agricultural
lenders do not specifically assess climate risk. The longer the
agricultural lending sector waits to assess and address climate risks,
the greater the likely severity of economic consequences--for lenders,
for farmers and for all Americans who rely on our nation's farmers to
put food on the table.
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\12\ GARP Risk Institute. (2019). Climate Risk Management At
Financial Firms: A good start, but more work to do. Results from a
global survey. Retrieved from: https://www.garp.org/newmedia/gri/
climate-risk-management-survey/AGoodStart_052919_PDF.pdf.
\13\ Board of Governors of the Federal Reserve System. (2011,
October 26). SR 11-14: Supervisory Expectations for Risk Management of
Agricultural Credit Risk https://www.federalreserve.gov/supervisionreg/
srletters/sr1114.htm.
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The CFTC Subcommittee report makes several recommendations that
would represent substantial steps forward in assessing climate risk to
agriculture and its financial institutions. These include recommending
that the research arms of federal financial regulators undertake
research on the financial implications of climate-related risks,
including the potential for and implications of climate-related ``sub-
systemic'' shocks in the agriculture sector. The report also recommends
that relevant federal regulators assess the exposure to and
implications of climate-related risks for the portfolios and balance
sheets of the government-sponsored enterprises (GSEs), such as Farm
Credit, and strongly encourage the GSEs to adopt and implement
strategies to monitor and manage those risks. Another key
recommendation is for regulators to work with financial institutions,
including agricultural and community banks, to pilot climate risk
stress testing that will enable stakeholders to better understand
institutions' exposure to climate-related physical and transition
risks, as well as to explore climate-related financing
opportunities.\14\
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\14\ Climate-Related Market Risk Subcommittee, Market Risk Advisory
Committee of the U.S. Commodity Futures Trading Commission. (2020).
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The CEO of CoBank, which is part of the Farm Credit System,
recently wrote that ``Concerns about climate change are now a permanent
part of the operating environment for rural America.'' \15\
Agricultural lenders are critical financial institutions in a sector
that is already experiencing substantial climate impacts. That fact
should be reflected in risk assessment and management in order to
prepare for and mitigate financial impacts to lenders and their farmer
borrowers.
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\15\ CoBank. (2019). Rural Industries and Climate Change. Retrieved
from: https://www.cobank.com/-/media/files/ked/general/rural-
industries-climate-
change.pdf?la=en&hash=234B62A18E2E279D82C84222C1E62DB343E9F816.
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Opportunities to Finance Resilient Agriculture
Two approaches are required to successfully navigate the challenges
posed to agriculture and agricultural lending institutions by climate
change: assessing and mitigating climate risk at the lending
institution level and supporting agriculture to become more resilient.
EDF published a report in September 2020 that addresses both topics,
titled Financing Resilient Agriculture: How agricultural lenders can
reduce climate risk and help farmers build resilience. \16\ The report
was informed by extensive interviews with agricultural lenders and
other experts, and included major contributions from the AGree Economic
and Environmental Risk Coalition, agricultural accounting and
consulting firm KCoe Isom, The Nature Conservancy and Scott Marlow of
Long Rows Consulting.
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\16\ Monast, Maggie. (2020, September). Financing Resilient
Agriculture: How agricultural lenders can reduce climate risk and help
farmers build resilience. Retrieved from: https://edf.org/aglending.
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While agriculture faces major risks from climate change, it also
has the capacity to adapt and build resilience to protect long-term
productivity and profitability. Many well-known conservation practices
that improve soil health, such as no-till, cover crops and diverse
rotations, can build resilience. Healthy soils increase the sponginess
of the soil, allowing it to absorb water during wet periods and retain
it during dry periods, improving field trafficability and improving the
resilience of crop yields.\17\ Along with edge-of-field practices such
as buffers and wetlands, agriculture can also contribute to resilience
at the watershed scale by holding excess water and reducing the
magnitude of flooding.\18\ The practices that build soil health also
have the potential to generate multiple environmental benefits,
including reduced erosion, improved water quality, reduced water use,
improved biodiversity, and reduced greenhouse gas emissions and
improved carbon sequestration.\19\\,\ \20\\,\ \21\\,\ \22\\,\ \23\
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\17\ Basche, A.D. and M.S. DeLonge. 2019. Comparing infiltration
rates in soils managed with conventional and alternative farming
methods: A meta-analysis. PLOS ONE 14(9):e0215702. doi:10.1371/
journal.pone.0215702.
\18\ Walters, K.M., Babbar-Sebens, M. (2016). Using climate change
scenarios to evaluate future effectiveness of potential wetlands in
mitigating high flows in a Midwestern U.S. watershed. Ecological
Engineering. pg 80-102. doi: http://dx.doi.org/10.1016/
j.ecoleng.2016.01.014.
\19\ Hunt, N.D., J.D. Hill and M. Liebman. 2019. Cropping System
Diversity Effects on Nutrient Discharge, SoilErosion, and Agronomic
Performance. Environmental Science & Technology 53(3):1344-1352. doi:
10.1021/acs.est.8b02193.
\20\ Mhazo, N., P. Chivenge and V. Chaplot. 2016. Tillage impact on
soil erosion by water: Discrepancies due to climate and soil
characteristics. Agriculture, Ecosystems & Environment 230:231-241.
doi: https://doi.org/10.1016/j.agee.2016.04.033.
\21\ Morton, L.W., J. Hobbs, J.G. Arbuckle and A. Loy. 2015. Upper
Midwest Climate Variations: Farmer Responses to Excess Water Risks.
Journal of Environmental Quality 44(3):810-822. doi: 10.2134/
jeq2014.08.0352.
\22\ Eagle, A.J. and L.P. Olander. 2012. Greenhouse gas mitigation
with agricultural land management activities in the United States--A
side-by-side comparison of biophysical potential. Advances in Agronomy
115:79-179.
\23\ Kim, N., Zabaloy, M.C., Guan, K., & Villamil, M.B. (2020). Do
cover crops benefit soil microbiome? A meta-analysis of current
research. Soil Biology and Biochemistry, 142, 107701.
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EDF and many other organizations and universities are collaborating
with farmers to quantify the financial value of these practices. These
analyses show that resilient farm management practices support risk
reduction and farm financial viability by stabilizing crop yields,
lowering costs of production, diversifying revenue streams and
preserving the long-term value of the land. Examples include:
Practices that improve soil health can allow farmers
to reduce input costs over time, as biological processes are
able to replace some synthetic nutrients, herbicides and
pesticides.\24\
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\24\ Rob Myers, Alan Weber, and Sami Tellatin. (2019). Cover Crop
Economics: Opportunities to Improve Your Bottom Line in Row Crops.
Sustainable Agriculture Research & Education. Retrieved from: https://
www.sare.org/Learning-Center/Bulletins/Cover-Crop-Economics.
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No-till has well-documented cost savings in fuel,
labor, and equipment due to fewer passes over fields and the
ability to invest in less machinery or machinery with lower
horsepower.\25\
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\25\ Monast, Maggie and KCoe Isom AgKnowledge. (2018). Farm Finance
and Conservation: How stewardship generates value for farmers, lenders,
insurers and landowners. Retrieved from: https://edf.org/farm-finance.
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Diverse crop rotations and the integration of
livestock diversify farm revenue sources and protect farmers
from both price and yield swings.\26\
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\26\ Roesch-McNally, Gabrielle, Arbuckle, J., and Tyndall, John.
``Barriers to implementing climate resilient agricultural strategies:
The case of crop diversification in the U.S. Corn Belt.'' Global
Environmental Change 48 (2018) 206-215.
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Grain farmers who used cover crops for five
consecutive years experienced a 3% increase in their corn yield
and a 5% increase in soybean yield. In the drought year of
2012, farmers reported even greater yield increases when they
used cover crops: nearly 10% in corn and 12% in soybeans.\27\
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\27\ Rob Myers, Alan Weber, and Sami Tellatin. (2019).
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Despite these benefits, farmers still must overcome multiple
obstacles to adoption. Short-term costs and risks during the transition
period may be a deterrent, especially in economically challenging
times.\28\ Common lending practices also create disincentives. Lenders
often lack information on the farm budget impacts of conservation
practices and may not be able to assist borrowers in projecting their
returns. Lenders also typically focus on the short-term repayment of
the operating loan, which can come at the detriment of long-term
profitability and financial stability. Finally, loan terms often do not
align with the transition period needed to adopt conservation practices
or accord value to them. This disconnect between credit requirements
and lender practices and the financial transition to farming practices
that build resilience can prevent farmers from adopting new
conservation practices.
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\28\ Monast, Maggie and KCoe Isom AgKnowledge. (2018).
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The agricultural lenders interviewed for the Financing Resilient
Agriculture report expressed a strong interest in improving their
understanding of the farm budget impacts of conservation practices.
Such information can be translated to lender decision-making, lending
programs and products that better serve farmers who adopt, or want to
adopt, practices that build resilience. While lenders cannot require
their clients to adopt specific practices, there are several existing
examples of lender programs or products that support farmers in
navigating similar financial barriers or transitions. For example, the
Farm Credit system has a longstanding history of supporting lending
programs for young, beginning and small farmers, which often include
credit enhancements and business counseling to help farmers grow their
operations.\29\ In addition, Rabobank AgriFinance and Compeer Financial
recently launched organic transition loans that help bridge the gap
between a farmer beginning organic practices and when the farm achieves
organic certification and receives a market premium.\30\\,\ \31\ These
examples show how lenders can develop new or modified loan programs or
products that can help farmers navigate transitions to different farm
management systems. Agricultural lenders could approach farmer
transitions to more resilient farming practices in the same way.
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\29\ Pellett, Nancy. (2007, August 10). Revised Bookletter 040--
Providing Sound and Constructive Credit to Young, Beginning, and Small
Farmers, Ranchers, and Producers or Harvesters of Aquatic Products.
Retrieved from: https://ww3.fca.gov/readingrm/Handbook/_layouts/15/
WopiFrame.aspx?sourcedoc=(788991C0-7E8B-43AC-ADB4-
55C500B85A94)&file=BL-040%20REVISED.docx&action=default.
\30\ Rabo AgriFinance. (2019, October 24). ``Rabo AgriFinance
Designs Industry's First Organic Transition Loan Offering.'' Retrieved
from: https://www.raboag.com/news/rabo-agrifinance-designs-industrys-
first-organic-transition-loan-offering-54.
\31\ Compeer Financial. (2020, February). New Organic Bridge Loan.
Retrieved from: https://www.compeer.com/Utility/Support/About/Newsroom/
Press-Releases/February-2020/New-Organic-Bridge-Loan.
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New lending programs that finance resilient agriculture will
realign lending structures to better match the needs of farmers who
adopt practices that improve resilience. Ultimately, this will benefit
both the farmer and the overall risk of a lender's portfolio. Where
initial programs and products do not meet current credit standards,
loan support from partners (e.g. USDA, foundations, food companies, or
impact investors) can help bridge the gap. The public sector is well
positioned to de-risk initial programs or collect the data needed to
allow loans for resilient agricultural practices to stand on their own.
Ultimately, the objective is to accurately reflect the value of
resilient agriculture in credit pricing and structures.
Equity Considerations in Financing Resilient Agriculture
The U.S. Department of Agriculture (USDA) defines socially
disadvantaged farmers and ranchers (SDFRs) as members of certain racial
and ethnic minority groups and women. A study of agricultural credit
services provided to SDFRs conducted by the Government Accountability
Office in 2019 found that they represented an average of 17% of primary
producers in the survey, but they accounted for only 8% of total
agricultural debt.\32\ This demonstrates the challenges that farmers of
color and women farmers face that restrict their ability to obtain
private agricultural credit. According to the GAO report, they are more
likely to operate smaller, lower-revenue farms; have weaker credit
histories; or lack clear title to their agricultural land, which can
make it difficult for them to qualify for loans. Farmers of color and
advocacy groups also report unfair treatment and discrimination in
lending.\33\
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\32\ U.S. Government Accountability Office. (July 2019).
Agricultural Lending: Information on Credit and Outreach to Socially
Disadvantaged Farmers and Ranchers is Limited. Retrieved July 2020 from
https://www.gao.gov/assets/710/700218.pdf.
\33\ Ibid.
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There is a critical intersection between considerations of equity
and resilience in agriculture and agricultural credit. Due to the
history of discrimination in access to credit, risk management and
other services,\34\ the economic impacts of climate change on
agriculture are likely to fall disproportionately on farmers of color
and small farmers. There are many opportunities to improve both the
resilience and equity of agriculture through inclusion of the expertise
of organizations led by farmers of color, women farmers and small
farmers. Strengthening support for farmers of color, women farmers and
small farmers within the agriculture sector can establish paths toward
long-term prosperity while helping to secure the future of resilient
food systems.\35\
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\34\ Tyler, Shakara S. and Moore, Eddie A. (2013). ``Plight of
Black Farmers in the Context of USDA Farm Loan Programs: A Research
Agenda for the Future,'' Professional Agricultural Workers Journal:
Vol. 1: No. 1, 6. Available at: http://tuspubs.tuskegee.edu/pawj/vol1/
iss1/6.
\35\ Union of Concerned Scientists and HEAL Food Alliance. (2020).
Leveling the Fields: Creating Farming Opportunities for Black People,
Indigenous People, and Other People of Color. Retrieved July 2020 from:
https://www.ucsusa.org/sites/default/files/2020-06/leveling-the-
fields.pdf.
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The Path Forward
Given the increasing severity and frequency of weather events
projected to continue affecting farmers across the country, a major
shift in the agricultural lending sector's approach to climate risk and
resilience is overdue. As farmers' closest financial partners,
agricultural lenders have a critical role to play in supporting
climate-resilient agriculture. This role is highlighted in the House
Select Committee on the Climate Crisis' Majority Staff Report, Solving
the Climate Crisis: The Congressional Action Plan for a Clean Energy
Economy and a Healthy, Resilient, and Just America through the building
block to ``Provide Lending, Credit, and Land Valuation Incentives for
Improving and Maintaining Soil Health and Carbon Sequestration.'' \36\
---------------------------------------------------------------------------
\36\ House Select Committee on the Climate Crisis. (2020, June).
Solving the Climate Crisis: The Congressional Action Plan for a Clean
Energy Economy and a Healthy, Resilient, and Just America. Page 340.
Retrieved from: https://climatecrisis.house.gov/sites/
climatecrisis.house.gov/files/Climate%20Crisis%20Action%20Plan.pdf.
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We agree with the report's recommendation for Congress to
incentivize data collection to demonstrate the reduced risk and
profitability benefits of conservation practices. While many studies
analyze farmer budgets and other relevant data sources, there is a
critical need to expand such analysis and connect it to the type of
information required by agricultural lenders and crop insurers for
decision-making and risk analysis. An important caution in this area is
to avoid relying entirely on data sources that exclude small farmers or
farmers of color. For example, farm management software is much more
commonly available to and used by large-scale farmers; small farmers
and farmers of color are not as likely to utilize this technology.\37\
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\37\ McDonald, J., Korb, P., Hoppe, R. (2013, August). Farm Size
and the Organization of U.S. Crop Farming. U.S. Department of
Agriculture Economic Research Service. Retrieved from: https://
www.ers.usda.gov/webdocs/publications/45108/39359_err152.pdf.
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The path forward to demonstrate the reduced risk and profitability
benefits of resilient agriculture will require methods to assess the
financial performance and resilience of farms of all types and sizes,
and an openness to learn from a variety of different operations. This
will also require clear protections for all farmers in terms of how
their data will be used and secured. Opportunities to support and
simplify farm recordkeeping for farms of all sizes would help overall
farm management as well as the assessment of farming practices that
build resilience.
This committee's recommendations related to the Federal Crop
Insurance Program are also noteworthy. Crop insurance is a trusted risk
management tool used by many farmers; it is also complex and potential
changes require careful consideration. Congress has the opportunity to
work cooperatively with farmers, the U.S. Department of Agriculture's
Risk Management Agency, and the crop insurance industry to
systematically assess how climate change is likely to impact farmers
and how crop insurance can mitigate those risks by incentivizing
resilience in agriculture.
Thank you again for the opportunity to testify today and to address
this important issue. Farmers are already experiencing the impacts of
climate change, and these risks flow through to the financial system
that finances and insures agriculture. To address these risks, greater
efforts must be made both in climate risk assessment and in fostering
resilient agricultural practices and production systems. Agriculture
financial institutions have a critical role to play in supporting this
transition, one that will ultimately benefit farmers, the financial
system, and the U.S. economy. EDF looks forward to continuing to work
with you on efforts to build resilience in agriculture.
Ms. Castor. Thank you very much.
Now, we will go to members for questions. I will recognize
myself for the first 5 minutes.
Dr. Syroka, you testified that the World Bank has been
helping countries use catastrophe bonds to manage their
disaster risks for more than 10 years. I think I saw something
like this in action in Florida following a devastating
hurricane season where they developed a backstop catastrophe
fund.
What steps should Congress take to ensure that cat bonds
and other innovative solutions are available as an option to
help U.S. communities, especially those that are vulnerable to
climate risks? And if you could also address the fact, we don't
want these to be used to incentivize intense development in
risky areas either. So what is your view?
Dr. Syroka. Thank you, Madam Chair. Indeed, these
instruments are being used around the world, in emerging
economies in particular, to help economies and communities
rebound after disasters. The World Bank has been instrumental
in helping countries tap our market.
My testimony has several recommendations for Congress to
consider to be--to enable the same kind of innovation that we
have seen abroad to happen here in the United States in public-
private partnerships that can--as you--to your point, help
communities deal with the risks they face.
One of the first recommendations we have would be to ease--
lower the barriers of access to this market for communities and
other public entities that would like to tap the market but
find it operationally difficult or resource prohibitive to go
offshore to enter into such transactions. And in fact, even
discuss such transactions. That is an impediment, we believe,
to more innovation in this space here in the United States.
The other recommendation we have is, of course, it is why I
have been talking about the financing parts of these things, a
lot of expertise and technical assistance is required for
communities, municipalities, utilities, transportation
providers, entities that want to tap this market space to
create programs that they would like to finance using these
funds.
There were some great recommendations on technical
assistance that the Federal Government could consider giving in
the staff majority report of the Select Committee, which could
go a long way to help communities understand how they can
leverage the technologies available there to manage the risks
they face. And anything that Congress can do to help Federal
agencies in particular identify, and then quantify, and then
consider working with the private sector to manage their risks
could go a long way of encouraging this process to begin.
You did have a question about incentivizing. Obviously, I
mentioned in my testimony that our market helps to put a price
on weather risk and, therefore, on--consequently, on climate
risk. The way that works at the highest level is, of course,
imagine a community development or property or infrastructure
that is well managed; all things being equal, a property that
is poorly managed shouldn't receive as competitively priced
insurance range. For instance, an ILS is the best management
property simply because when a disaster strikes, they will
experience bigger losses. That is invested in the space. When
we look at security, these are things we consider in our
underwriting and investment process, and that is how that
pricing signal is transmitted.
Ms. Castor. So for local communities, that means building
standards, building codes, land use policies?
Dr. Syroka. Absolutely it would be.
Ms. Castor. Okay.
Dr. Syroka. And we--that would begin to establish that
feedback loop. That is precisely to your point, Madam Chair,
establishes incentives for better risk management in the long
run. Having that price of risk allows communities, for example,
to make more optimal decisions on how the various options they
have, mitigation, do nothing, ensure the options they have
before them, they can make optimal decisions on how they
allocate their limited resources to deal with the problem.
Ms. Castor. Thank you very much.
Ms. Monast, you have testified about the importance of
adopting conservation practices that improve soil health and
build resilience, and similar to our solving the climate
crisis, the majority staff report. But EDF has recent reports
that also identifies barriers to financing resilient
agriculture. What else should Congress be aware of here as we
move forward?
Ms. Monast. I think two things that Congress should be
aware of, one was noted in your report, the opportunity for
data collection and coordination to link practices that build
climate resilience with farm profitability. That would be
really important for the decisionmaking of farmers, lenders,
and insurers. And the other policies to spur innovation, to
spur new products or programs that can help farmers get through
the transition to more resilient practices.
Ms. Castor. Great. Thank you very much. We are going to
work more on this together.
Ranking Member Graves, you are recognized for 5 minutes.
Oh, I guess he is not here.
Okay. We will go to Rep. Bonamici, you are recognized for 5
minutes.
Ms. Bonamici. Thank you, Chair Castor. And thank you all
for your testimony.
Last summer, I had a chance to visit a place called 46
North Farm. It is in beautiful classic county in the Pacific
Northwest outside of Astoria, Oregon. So the farmers there
don't irrigate their crops. Even during the dry season, they
work to conserve soil moisture through a variety of management
strategies, like the use of cover crops that help them access
water and nutrients in the soil later in the growing season. So
dry farming practices. They have allowed 46 North to restore a
significant portion of the land which was previously heavily
degraded. This is a pretty successful model that could and
should be scaled up across the country.
But, Ms. Monast, following up on the chairwoman's question,
in your testimony, you noted that common lending practices can
create disincentives for adopting resilient agricultural
practices like no-till, cover crops, and diverse rotation. So
can you talk a little bit about what those disincentives are,
and how Congress can decrease the financial risk for adopting
climate smart agricultural practices?
Ms. Monast. Yes. Thank you, Congresswoman. So some of the
disincentives and common lending practices are, one, just
lenders not having information on the financial attributes of
the types of farms that you mention, which often differ from
conventional farmland. Two is other short-term focus often,
especially with yearly operating loans that are used with many
farms, both by repayment and on long-term profitability and
resilience. And another is that loan terms often don't align
with that financial transition to help the farmer through.
As for what Congress can do, I would, you know, point back
to my previous answer about helping with the data, first of
all. And, second, focusing on spurring innovation and helping
to foster those types of products that could better assist the
kinds of farms that you mention.
Ms. Bonamici. Great. Thank you so much.
Moving on to Dr. Syroka. I hope I am pronouncing your name
correctly. Could you talk about how innovative finance
practices could support rapid and resilient recovery from
natural disasters? For example, the wildfires that we are
seeing currently in Oregon and across the West today. How could
innovative finance practices help with the recovery, Dr.
Syroka?
Dr. Syroka. Thanks for the question. And first off,
obviously, there are communities today that are suffering
throughout this country because of wildfires, the hurricanes
that hit. I pretty much am aware that my testimony today can't
do anything to help those families that are already suffering,
and our condolences go to them. I talk about catastrophe risk
in my testimony, but it is a catastrophe when anyone loses a
house or a business. But, hopefully, some of the
recommendations we have can help future disasters as they
affect communities not have the big economic consequences that
we are seeing today.
I think most people agree that traditional disaster relief
approaches are not as timely and equitable as they could be.
And often in this situation, the most weakest link in the
chain, the most vulnerable communities are the ones left
dealing with the risk alone while resources are mobilized to
help them. And we know that can take days, weeks, months. And
in that time, suboptimal decisions are made that can impact an
individual, a family, a business for a long time in terms of
their economic advancement and productivity.
Obviously, if communities knew that if Y happens, they will
get X and they will do Z, as you say here in America, then
there is a lot more information that they can rely on to make
better decisions in the face of crisis. That takes many
elements, and one of those is force contingency financing, like
the tools that I mentioned in my testimony. So when a disaster
strikes, you know the financing is there to help to implement
your Y and your Z. And that is another critical point though,
you do need the Y and the Z to really unlock the promise that
insurance and timely and reliable financing can give you.
So as I mention in my testimony, disaster--broader disaster
risk management plans where these tools are embedded in them to
make sure the financing flows in a timely fashion can
potentially unlock more desired effects in terms of helping
communities rebound. If there are plans in place to minimize
economic negative consequences and even better--build back
better, and more resiliently to protect communities and the
economy from future disasters.
So we have a role to play in facilitating those disaster
resiliency plans.
Ms. Bonamici. Thank you so much. And we have a community
out in Oregon, for example, on the coast that took close to a
decade to be able to come up with the funding to move their
schools out of a tsunami inundation zone. And when you think
about how risky that could have been had there been an
earthquake, a nearshore tsunami, it would have been disastrous.
So there is a lot that we can attribute to it. Thank you,
Doctor.
I yield back the balance of my time.
Ms. Castor. Perfect.
Rep. Levin, you are recognized for 5 minutes.
Mr. Levin. Thank you, Chair Castor. I appreciate it very
much.
Ms. Monast, I wanted to follow up, I am very interested in
regenerative agriculture. In fact, I saw a movie, a new movie
on Netflix about it, which even had some scenes filmed in my
district. So I wanted to ask you about it.
Clearly, an important piece of mitigating the climate
crisis, reducing emissions, sequestering more carbon, and
increasing biodiversity. And in your testimony, you mentioned
practices associated with it, such as no-till, cover crops,
diverse rotations, as we have discussed, to build resilience
and improve soil health.
So if my colleagues across the aisle were here--I don't
think any of them are. I think we see Mr. Graves' white board,
but I don't think he is actually there. But if they were here,
what would you want to tell them about regenerative agriculture
and, specifically, what role it would have in making farms more
resilient to the financial risks associated with the climate
crisis?
Ms. Monast. I haven't seen that movie, but my mom thought
it was fantastic.
So I think the benefit of this work in agriculture is it
really is bipartisan and appeals to all sides. These practices
have multiple benefits, both to the environment and also
financially for farmers. We have a 20-farmer advisory board--
bipartisan--that advises us on our work. And they really have
seen that once you get through this initial transition period,
there are multiple benefits to their soil and to their
finances. So I think that is the most important thing to focus
on, and then the enabling environment to allow more farmers to
build their resilience.
Mr. Levin. Thank you for that. I highly recommend everybody
see the movie.
Ms. Syroka, I wanted to ask you, in your fourth
recommendation to the committee you say, quote, ``Congress
should consider legislation to encourage Federal agencies to
work with the private sector to better manage and transfer
climate risk,'' end quote. And as I mentioned during our first
panel, Representative Casten has a great bill to require public
companies to disclose how they will be impacted by the climate
crisis and hopefully creating an environment of transparency
for investors.
Disclosure is absolutely essential to ensuring investors
and companies make informed decisions on those investments.
However, in your recommendation, you specifically mention
management and transfer of climate risk.
Ms. Syroka, what policies would you recommend to help
companies manage and transfer this risk?
Dr. Syroka. Thank you, Congressman. I mean, the first step
in managing any risk is to identify it and to quantify it. And
we have had much discussion earlier on today about policies
that can help companies do that. But also I believe these are
steps that should be done within Federal agencies and
government agencies too. Many--actually, there was some great
recommendations in the staff--Select Committee's majority staff
report on encouraging entities, states, and municipalities,
communities to look at innovative risk transfer to seek or to
provide technical assistance to these entities so they can
quantify and identify their risks. There were also other
recommendations to do risk data availability.
Those are all the critical steps that are required for
companies to--for companies to entities to be able to
understand their risks and then make the optimal decisions in
how they should be managed. And risk transfer is one of those
options, but there could also be decisions to mitigate or to
manage the risk as it is to the extent it cannot be mitigated
or transferred.
So I think all the recommendations have been--many of those
key recommendations have already been made in the staff
majority's report that I had the pleasure of reading before
this testimony.
Mr. Levin. Terrific.
I want to thank you both for taking the time to speak with
us. And thanks to all three of you for all the good work that
you are doing.
And I yield back.
Ms. Castor. Okay. Are there any Republican members here on
standby?
All right. If not, then, we will go to Rep. Casten, you are
recognized for 5 minutes.
Mr. Casten. Thank you, Madam Chair. Thanks to our
witnesses.
Ms. Syroka, in your written testimony, you made reference--
and I don't have it right in front of me, so I hope that I am
getting this right--that there are financial products that
could allow insurers to hedge risk and then pass that risk that
insures the hedge risk, and then pass that along to the global
bond market. Is there a concern that could create some other
systemic risks either to those bond holders or to, you know,
borrowers that have completely unrelated lines of debt but are
drawing on similar liquidity pools?
Dr. Syroka. That is a great question, and I understand the
concerns that you may have, given the global financial crisis
and previous shocks to the financial system. I would say the
bonds that you are referring to, Congressman, are insurance-
linked securities. My company is an insurance-linked securities
manager. These bonds are fully funded, i.e., the money required
to--the maximum these bonds could possibly default has already
placed its collateral against the risks they are underwriting.
Investors around the world usually invest through
specialized agencies, managers like us. And our job is to try
and identify the risks to these securities, which are very
specific catastrophe risks. Often, as I mentioned in my
testimony, insurance industry loss events that stress balance
sheets the most. And our job is to make sure our investors are
adequately rewarded for setting capital against those risks.
I think we can all agree, I think many people understand
there is a lot of capital in the world seeking a productive
home, and our market is providing a real economic function by
supporting the insurance markets here in the United States.
That is why insurers are tapping our markets, as are
reinsurers, those are companies that insure insurance
companies, because they see risks increasing, yet they want to
continue to provide coverage.
And our markets and these bonds that we discussed
essentially allow them to transfer risks from their balance
sheets, the ones that provided the most concentrated risks from
the balance sheets so that we can continue writing coverage to
those areas that need it most. But I should say--[inaudible]
fully collateralized and not subject to similar blowup risks
you may experience in other markets.
Mr. Casten. Well, I am delighted to hear about the
collateralization. When we have had some folks in the insurance
sector before us in the past sessions, what several of them
have noted is that, for the most part, their policies don't
extend much beyond a year or two. So where does that risk
reside in the financial system?
You know, if I am insuring a 30-year mortgage on a coastal
property, I know I am going to rewrite the policy every year.
Within the financial sector, where does that risk sit?
Dr. Syroka. It currently sits with the investors in the
mortgages. You know, you are right, insurance companies reprice
every year, in general. They won't have to reprice, though.
Insurance is a permanent feature of our economy. But those
prices may well move.
Our role as a market is to provide--to relieve the pressure
from the insurance system of these increasing risks because
they are creating protection gaps and gaps in coverage. And
they are the ones particular that stress those balance sheets
the most. So, yes, our market is fully collateralized, and in
fact, many of the securities in our markets are more than 1
year; they can be 3 years, up to 5 years, so in terms of
locking capacity.
Mr. Casten. If I could--and I am sorry for being quick, but
I know we are tight on time. My concern is that we have got
these risks that are going exponential and the holders, our
brains, tend to think linearly too often.
Dr. Syroka. Absolutely. And that is why we need to consider
a new type of finance to deal with these exponentially growing
risks, and that is tapping into the deeper pockets of the
capital markets that can manage those risks more effectively
than rated and regulated balance sheets.
Mr. Casten. So I have introduced the Climate Change
Financial Risk Act with Senator Schatz that is specifically to
direct the Fed to essentially recognize climate as a systemic
risk. Because I was concerned that there is a--in spite of the
good work you are doing, there is a gap in markets that time-
dating, and it is going to end up being held ultimately by the
equity, I suppose, which gets wiped out.
I have more questions, but with 30 seconds left, I think I
am out of time, so I will yield back, Madam Chair, rather than
trying to rush something through. Thank you.
Ms. Castor. All right. Rep. Huffman, you are recognized for
5 minutes.
Mr. Huffman. Thank you, Madam Chair.
Mr. Powell, thanks for your testimony. I want to thank you
first for acknowledging that the climate threat is real and
that we need to address it. And I also appreciate your
suggestion that we need to address it in a way that keeps us
globally competitive and doesn't cede influence and leverage to
some of our geopolitical rivals around the world.
I think the only thing you and I might disagree with in
that conversation is that I am guessing you may believe that
some fossil fuel technologies would qualify as clean energy as
we try to outcompete our global rivals in that effort, and I
don't think so. But we can talk a little more about that.
I am interested in exploring this trope that we hear a lot,
unfortunately, from some of our colleagues across the aisle.
Yesterday, for example, in the Natural Resources Committee,
Congressman Levin had a bill to simply take away some of the
sweetheart terms that for decades would give the oil and gas
and coal companies on public lands that give them--make them
pay a fraction of what they would pay for leases and royalty
payments on private land or on State land. Simply taking away
some of these subsidies.
And whenever we talk about doing something the fossil fuel
industry doesn't like, we hear this trope that, oh, we are
going to lose our energy independence and we will have to go on
bended knee to Putin and the Saudis. Never mind the irony that
our president is already on bended knee to Putin and the
Saudis, but the answer to that is more likely in his tax
returns than in our energy policy.
But back to what actually creates influence for regimes
like Russia. Wouldn't it be devastating to Russia's global
influence if we were to lead the world toward clean energy and
dramatically reduce dependence on the one thing Russia has,
fossil fuel?
Mr. Powell. Well, first, thank you for the question,
Congressman. Thank you as well for your leadership on these
issues, including a sponsorship of the SEDA Act and the ARPA-E
Renewal bill, very important innovation legislation. So thank
you for all that.
Just quickly on the point about fossil fuels. I do think it
is more productive to keep the conversation focused on
emissions rather than on the fuels. So if we can advance the
technology in a way that removes the emissions for our fuel
sources, why wouldn't we continue to use the technology, if, if
it is----
Mr. Huffman. Okay. Let's come back to that. Let's come back
to that because I do have a follow-up about that.
Mr. Powell. So--and then on your point, sir, so absolutely,
we need to be focused on developing everything we can that can
combat Russian and Chinese influence around the world. Both
countries are using their energy exports very effectively as
tools of strategic diplomacy. You know, Russia, as you know,
through the Gazprom system, attempts to build influence in
Europe to its very leaky gas pipeline system, right----
Mr. Huffman. Right.
Mr. Powell [continuing]. Which is much, much--so, you know.
U.S. LNG exports, for example, into Southern Europe, even with
all of the energy penalties of the LNG, still have 40 percent
lower life cycle emissions than pipe gas into Western Europe
through the Gazprom system. So we can combat that through
today's technology with LNG. We can combat that through
tomorrow's technology with LNG combined with CCS power plants,
or with hydrogen and ammonia production. And, of course, we can
also combat that with, you know, advanced storage technology or
advanced nuclear technology.
Russia, of course, also has significant, probably global
and leading nuclear exports. That is kind of their virtual
pipeline network around the country--or around the world in how
they exert influence. And that is another area where we need to
push it back.
Mr. Huffman. Okay. All right. Well, thank you for that.
So here is the disconnect that I don't quite understand. If
this is about preventing countries around the world from
getting hooked on the fuels that some of our geopolitical
rivals would continue to sell them, why would we not want every
country around the world to go solar and wind and geothermal
and embrace the technologies that, first of all, are cheaper
than these fossil technologies these days, but, second, they
won't have to be dependent on any other country? Once that
technology is in place, they are not going to be under anyone's
thumb. Why wouldn't that be devastating to Russia and to China?
Mr. Powell. Well, it certainly would be devastating to
Russia and China if we were to remove their influence from the
energy markets. Here is the reality, though, today. We have to
look at the cost of the energy systems that these countries are
building. And so while the production costs of wind and solar,
and in some sense, geothermal and hydropower today can be quite
low, the system costs of building a whole system that produces
that technology--produces energy from that technology 24/7, 365
are actually not quite competitive today with a system relying
purely on subcritical coal.
So, for example, Pakistan right now, extremely cost-
sensitive, is building a system that is mostly subcritical
coal, and some wind and solar on top of it. Which is probably
for them, they don't really care about--well, they are at a
point in their development trajectory where they are not
prioritizing low-emission energy. For them, it is the lowest
cost system that they can put in place. And that is what we
need to change.
Mr. Huffman. Right.
Mr. Powell. We need to have the technology, a flexible
technology which can replace that subcritical coal power that
is providing a baseload of flexibility. And perhaps that is a
grid-scale solar system, perhaps that is a hydrogen power plant
that uses renewable energy, perhaps that is a hydrogen power
plant that uses nuclear to produce the clean hydrogen. So there
are all kinds of options we should be pursuing.
Mr. Huffman. I appreciate the conversation.
And I yield back.
Mr. Powell. Thank you.
Ms. Castor. Sure thing.
All right. Congresswoman Brownley, you are recognized for 5
minutes.
Ms. Brownley. Thank you, Madam Chair. And for some reason I
can't find the clock on my screen, so I will try not to exceed
my time.
But, Ms. Monast, I wanted to thank you first for being
here. And I also want to thank you for your help in my office
where you have been helping us put together a bill that would
initiate a study into the unique challenges faced by farmers
who lease or rent lands in terms of being able to participate
in conservation practices.
Could you just share a little bit about some of those
challenges, you know, for our farmers who are wanting to do the
right thing but are renting or leasing land?
Ms. Monast. Yes, Congresswoman. And thank you also for your
collaboration and for your staff's great interest in this
topic.
So a high percentage of farmland in the U.S. is rented. I
think it hovers around 50 percent nationally, but it varies
depending on where you are, and it can be as high as 70 percent
in some states. And if you think about it, that kind of splits
the incentives that we are talking about, because if we are
talking about building back the soils, managing the long-term
value of the land, that sits with the landowner, but the person
who does the farming is the farm operator. And they are often
the person who incurs the cost, especially if they are on an
annual cash rent lease.
So what I hope we are able to explore in collaborating with
your office is figuring out how to rejoin those incentives so
that the landowners' interest is better matched with the
farmers.
Ms. Brownley. What does a typical lease look like for a
farmer in terms of longevity in land?
Ms. Monast. Well, leases can be structured in any number of
ways, but the predominant formula that I am aware of is annual
cash rent. Which, you know, it is because it is simple and
easy, but that also means that the farm operator essentially
doesn't have a stake in the long-term value of the land.
Ms. Brownley. Right, right, right. I just, that is
surprising to me, actually, that if you think of, you know,
roughly 50 percent and they are on annual lease--anyway, I
appreciate that.
I wanted to ask Ms. Syroka a question also. This is--what
you do is all relatively new to me, but I was just actually
curious to know that it sounds like the ILS market is, you
know, has emerged over the last 30 years. It sounds like you
see it as something that is--can grow exponentially towards in
the future. But does there come a point where there are--these
kinds of securities are--get to a place where they are no
longer attractive to investors because disasters are just
happening, you know, one on top of another and happening
regularly? It sounded like you just said earlier that the more
disasters, the better the market. But can you hit a point of no
return, I guess, is the question?
Dr. Syroka. That is a great question. I believe we are a
long way from that point of no return. And let me explain. The
reason--the primary reason why investors are attracted to our
asset class, obviously I mentioned the ESG elements of it in my
testimony, but, fundamentally, our asset class brings very
important diversification to their portfolios. Investors
already highly expose the equity markets to the bond markets.
They are always seeking alternative investments that can bring
them some kind of diversity--diversification, and even better,
in the long run, of course, expected return.
So far, our market is about 0.1 percent approximately of
the global bond markets. It is nearly a hundred billion dollars
in size. It can grow. It can grow quite a long way before it--
the issues you discussed become material for our investors.
Obviously, I had mentioned in my testimony how the pricing
can provide a very important signal to those bringing risk to
the markets in terms how much that cost--that risk costs. And
our job as an investment manager is to make sure as a
fiduciary, our investors, are fairly compensated by that risk.
But the appetite is certainly there.
And I should say, you know, as--while climate risk in terms
of temperature obviously is increasing, the reality on the
ground is there are many different risks, for many different
businesses, for many different regions in different parts in
the world. There are opportunities to create portfolios of
risks for our investors. It is not a one-way bet against
temperature. There are many things--there are many different
ways in which people will need to tap our markets in the
future.
So, in summary, I think we are a long way before we get to
that point of no return. And in the meantime, our asset class
already provides a very important role for market, U.S. market,
the U.S. insurance markets and stability. And indeed, as risks
continue to outpace supply, we believe it will grow. And there
is definitely interest from the investor community to support
that growth.
Ms. Brownley. Thank you so much.
And, Ms. Monast, I want to say just thank you again for
working with our office on this bill. We really do appreciate
it.
And with that, I will yield back, Madam Chair.
Ms. Castor. Terrific.
I understand that the ranking member may be on his way
back. So I will go to Rep. Casten, if you would like to ask
your question you needed more than 30 seconds for.
Mr. Casten. Oh, you are very kind. I wanted--this will
surprise all of you, I wanted to nerd out a little bit with Mr.
Powell.
Rich, nice to see you again.
Mr. Powell. Nice to see you too.
Mr. Casten. I want to really thank you for raising this
comment that I think we talk about too little, about removing
barriers to clean energy. We always talk about creating new
incentives; we don't talk nearly enough about removing
barriers. You know, the IMF has said that we have got $650
billion a year in subsidies to the fossil fuel energy industry,
which is about the--our defense budget. That is why I recently
introduced the End Oil and Gas Subsidies Act, to eliminate just
11 specific provisions in our Tax Code.
But the point I want to raise with you is that you said a
couple of times that the energy system costs are what matter,
and they are not competitive with subcritical coal. There is a
certain efficient markets hypothesis that is buried in there.
Would you not agree that in a capital intensive commodity
industry, that the party who owns the existing capital asset is
sitting on a massive barrier to entry that keeps--makes it
harder for other people to enter to sort of participate in an
efficient market?
Mr. Powell. Yes.
Mr. Casten. And would you not also agree that the costs of
capital--not capital construction, but the weighted average
cost of capital, equity, and debt--is an awful lot different if
you are a state-subsidized electric monopoly than if you are a
scrappy, independent clean energy producer?
Mr. Powell. Sure. I mean, a regulated entity will have
closer to public finance, right? And this is also, of course,
the problem in a lot of the developing world, where you have
state-owned enterprises like the Chinese sort of state-owned
coal production and energy generation utilities that are just--
you know, they employ 10 million people, and they are
completely----
Mr. Casten. Sure.
Mr. Powell [continuing]. 1 in 10--1 in 100 work in that
industry, right?
Mr. Casten. Sure. And----
Mr. Powell. And it does lead them to make some decisions
which are probably not, on their face, economically rational or
at least not electricity price minimizing, but they might be
economic value maximizing for that entire economy or value
chain in China, which, you know, might be why they are making
those decisions.
Mr. Casten. So I spent, as you know, 20 years in the energy
industry. And, you know, I remember what a shock it was when
regulators actually brokered the idea that Public Service of
New Hampshire might be allowed to go bankrupt. That was a
complete shock to the way that utilities thought about it. And,
of course, in South Africa, you know, when Eskom was facing
that, it didn't happen.
So, given that, when you say that clean energy is not
competitive on an energy system cost perspective with
subcritical coal, I have a hard time squaring that logic,
because there ain't nobody building subcritical coal plants
except for state-subsidized massive utilities. And the kind of
systems that Mr. Huffman was talking about are essentially
being built by scrappy, independent producers--you know, people
putting a solar panel on their home, you know, private
companies.
So I think there is a danger when we talk about what is
competitive. We can stipulate that, if we had a clean sheet of
paper, technology X, if we built everything from scratch, would
have a fundamentally lower cost, independent of the cost of
capital, and then have a totally different question if we said,
well, what about the incumbent, who already has the existing
asset, who can squeeze margins a little bit and keep your cost
of capital down, and effectively has a guarantee against going
bankrupt. That is going to keep us from getting to the optimal.
So how should we be thinking in a more honest way about--
how do we make sure that we build a true lowest-cost energy
system?
Because between you and me, and I know from our prior
conversations, the lowest-cost energy system is also the
cleanest energy system, but there are these massive
institutional barriers to getting there because of the power of
incumbency and the distorting power of market subsidization of
all the subsidies.
Mr. Powell. So I do think it matters a lot on where you are
in the world, what the lowest-cost energy system would be. So
if you are, for example, in Pakistan and you have abundant
thermal coal that you can either access domestically or in that
whole, kind of, seaborne, you know, Indian Ocean thermal coal
region, where you have South Africa, India, and Indonesia all
competing for ultra low-cost thermal coal shipments, and then
if you are building--if you were trying to rapidly electrify a
population, you know, we are not only looking at the costs of
building the wind and the solar, the geothermal and the hydro;
we are also looking at the transmission costs, the interconnect
costs, the backup costs required to level out and firm up that
power.
There is actually quite a bit in there, right, in addition
to just the unit costs for adding the additional wind farm--and
you know as well as I do, there are two wind projects in upper
MISO that had to cancel. The wind projects themselves were
incredibly cost effective, but the new transmission required to
access that regional transmission organization would have been
twice the cost of the new wind farms, right? And so----
Mr. Casten. So I have chewed up my time, and, as I feared,
this is----
Mr. Powell. Okay.
Mr. Casten [continuing]. Going to be too long. But I guess
I would just make the comment that there isn't an energy market
in the world that is actually subject to truly competitive
market forces.
Mr. Powell. I will agree with that.
Mr. Casten. And if we don't acknowledge that in the first
instance, then we get into this, ``well, is something
competitive on the margin'' that sounds like we are talking
about capitalist economics but we are not, and we just need to
be careful of the words.
I yield back. Thank you so much.
Ms. Castor. All right. Outstanding.
Ranking Member Graves, you are recognized for 5 minutes.
Mr. Graves. Thank you, Madam Chair.
Madam Chair, in between witnesses or members earlier, you
mentioned the climate resolution that you had invited us to
cosponsor. And I do appreciate that.
Our concern with the resolution is that it actually
supports or it embraces an agreement that would result in a net
increase in global emissions. We would support one that would
result in a decrease in emissions. We think that is better for
long-term stability and certainty related to risk, which we are
discussing at this hearing today.
And so I would be happy to talk with you and all members of
the committee about a resolution that would actually result in
global emissions going down, not one that would agree with the
concept of global emissions going up, as the one referenced
earlier.
Mr. Powell, Vanguard recently released an ESG fund that is
designed to oppose nuclear projects. Don't want to pretend to
be an expert on nuclear, necessarily, but I do know that nearly
20 percent of our electricity portfolio is provided through
nuclear energy. It is an emissions-free energy source.
Just 2 weeks ago, the Nuclear Regulatory Commission
approved designs of a small scale nuclear reactor. I don't know
that I fully appreciate the thought behind that, and just
wondering if you could shed any light or if you had any
thoughts there.
Mr. Powell. Well, first, thanks very much, Congressman
Graves. Thanks for your leadership on these issues, for your
introduction of BUILDER last week. To Representative Casten's
point, it is extremely important to take the regulatory burdens
out of the way of building new clean energy as rapidly as
possible, so a very, very important step. Thank you for that.
This pains me to say as a Vanguard customer, as perhaps
other folks on this are, but, you know, they have continued
this troubling push in the ESG market of putting a ban on
nuclear investments, right alongside--and this is ridiculous--
right alongside, literally, a ban on pornography, tobacco, and
firearms sales. And so they are sort of lumping, you know,
nuclear energy in with a bunch of, you know, call them ``sin
goods,'' if you will, which is, you know, I have to say, I
mean, quite an outdated notion at this point and, if you are
climate focused, like I am, you know, I think, pretty bankrupt,
right?
So, if you are then looking at saying, well, any company
that either has very significant nuclear assets, like some of
the cleanest electric utilities both in the United States and
around the world, or a new company that is trying to scale up a
new nuclear reactor technology, that you would then be, you
know, X'ed out of any ESG financing is a pretty troubling
notion.
And it is something that we and many others, I think, have
pointed to and said--you know, look, the broader framework of
ESG, all for it. You know, companies taking into account the
physical risks of climate change, you know, all for it. But
these very outdated notions which cut against climate change
and a solution to this problem, that seems just very
counterproductive.
Mr. Graves. Because if we lost 20 percent of our portfolio,
you are likely going to have that filled with emitting sources
of electricity, and so you would result in greater emissions. I
don't think you could deploy renewable technologies fast
enough. And, of course, you would have the affordability issues
as well. And I know that I heard Mr. Casten expressing concern
about some of the market distortions from subsidies and things
along those lines.
Hey, one other question, Mr. Powell. So, you know, we have
an abundance of conventional energy in the United States. There
is no question we do. We have all discussed many times in this
committee this issue of the exportability of climate change
solutions, energy solutions.
Can you talk a little bit about just this resource rich
conventional fuel sources we have in the United States and the
role of affordable CCS technologies and how that works in, sort
of, a global strategy toward energy and climate change?
Mr. Powell. Sure. Thanks for the question.
I mean, I think it is fair to say at this point that we
have nearly infinite natural gas in this country, right, and
practically infinite coal as well. And so, again, we are very
focused on the emissions from various sources, not the
underlying fuel source. And so, if we can find a way to take
advantage of that extremely low-cost natural gas, for example,
and use that as a way to displace global emissions, we think
that that is a very, you know, very straightforward way that
will continue to build on our energy abundance, continue to
build our geopolitical opportunity and strategic, sort of,
dominance in this sector.
And so, whether that is, you know, using today's
technologies, exporting liquefied natural gas to the rest of
the world; eventually putting up CCS gas plants on the other
end of that so that, when they import the natural gas, they can
then make clean electricity on site; doing what has been
proposed in Louisiana with the zero-emission LNG facility that
would use on-site NET Power units to liquefy that natural gas
in a zero-emission way, potentially, you know, producing large
amounts of hydrogen, clean hydrogen, using natural gas steam
methane reformers with CCS on them. Today, that is the cleanest
or the cheapest way to make zero-emission hydrogen globally,
would be the, quote/unquote, ``blue hydrogen'' route.
So, as long as that is the cost-competitive way to move
forward on flexible, zero-emission energy systems, I see no
reason that we wouldn't, you know, continue to leverage that
abundance we have here.
Mr. Graves. Thank you.
Madam Chair, thank you.
I just--look, I know that the clean-energy future and
emissions reductions is a goal we all share. I just think we
have to be really thoughtful about the international
implications and the affordability and exportability of the
solution.
So I thank you and yield back.
Ms. Castor. I hope we share that vision for the clean
energy future, because the escalating cost and impacts of the
climate crisis are upon us.
But I want to thank our witnesses today--Dr. Syroka, Ms.
Monast, Mr. Powell--thank our committee members.
Your testimony was very illuminating.
So, at this point, I will adjourn the hearing. The hearing
is adjourned. Thank you.
[Whereupon, at 3:45 p.m., the committee was adjourned.]
United States House of Representatives
Select Committee on the Climate Crisis
Hearing on October 1, 2020
``Creating a Climate Resilient America: Strengthening the U.S.
Financial System and Expanding Economic Opportunity''
Questions for the Record
The Honorable Rostin Behnam
Commissioner
Commodity Futures Trading Commission
the honorable kathy castor
1. What are the costs to consumers, including public health
implications, associated with business-as-usual electricity and energy
policy? How do we maximize the benefits and minimize the costs of a
transition to a clean energy economy?
The costs to consumers and the general public resulting from
business-as-usual electricity and energy policy and the attendant
climate change are significant. Managing Climate Risk in the U.S.
Financial System (the ``Report'') \1\ describes negative impacts across
the economy, including on agriculture and ecosystem services,
infrastructure, and commercial and residential real estate.\2\ With
respect to general economic impact, the report notes:
\1\ Managing Climate Risk in the U.S. Financial System, Report to
the CFTC's Market Risk Advisory Committee by the Climate-Related Market
Risk Subcommittee (Sept. 2020), https://www.cftc.gov/About/
AdvisoryCommittees/MarketRiskAdvisory/MRAC_Reports.html (the
``Report'').
\2\ Id. at 13-19.
[T]he latest research suggests that, by the end of this
century, the negative impacts on the United States from climate
change will amount to about 1.2 percent of annual gross
domestic product (GDP) for every 1 degree Celsius increase
(Hsiang, et al., 2017). This is roughly the equivalent of
wiping out nearly half of average annual GDP growth rates in
recent years. There is great uncertainty about how those losses
may be distributed across the United States and within any
given sector or asset class. But the research suggests that the
South, Central and mid-Atlantic regions likely will be more
heavily impacted than northern regions.\3\
---------------------------------------------------------------------------
\3\ Id. at 13.
---------------------------------------------------------------------------
In particular, the Report explores health implications in depth:
Human health is significantly exposed to climate-related
physical risks. Health impacts from climate change include
extreme heat exposure; degraded air quality; infectious, water-
and vector-borne diseases; food contamination and declining
access to nutritious foods; chronic physical and mental stress;
and, physical injuries and mental distress from extreme events
(Ebi, et al., 2018). Many of these health impacts and
corresponding financial costs have been shown to
disproportionately burden low-wage workers and historically
marginalized populations (Schmeltz, et al., 2016; Wondmagegn,
et al., 2019). Thus, mitigating climate change would reduce
economic burdens that amplify economic inequality. For
instance, a decline in the use of fossil fuels will improve air
quality, which would have a disproportionately positive impact
in certain marginalized communities (Bullock, et al., 2018).
These impacts could also reduce labor capacity and
productivity, which in turn could reduce the capacity of
workers and employers to pay for healthcare services. Most
critically, extreme heat is anticipated to greatly impact human
health and lead to greater rates of premature mortality. From
extreme heat alone, annual damages from premature death in 2090
were projected to be between $60 billion (2015) and $140
billion (EPA, 2017). States in the Southeast and Great Plains
could see declines in labor capacity approaching 3 percent
(Dunne, et al., 2013; Houser, et al., 2015); some locations in
Florida and Texas could see a total loss in annual labor hours
of 6 percent or more (Gordon, 2014; EPA, 2017). Six percent is
the equivalent of losing two weeks of income a year. By 2090,
total impacts from extreme heat attributed to climate change
could result in more than 2 billion lost labor hours,
corresponding to $160 billion (2015) in lost wages (Graff Zivin
and Neidell, 2014; Hsiang, et al., 2017; EPA, 2017). Indeed,
companies that rely on outdoor and manual labor may face
physical risks from declining labor productivity and higher
costs associated with workers' compensation, health insurance,
and general liability insurance. They may also face pressure to
increase wages to attract workers for such physically demanding
employment (Day, et al., 2019) . . . .
Finally, as the COVID-19 pandemic has made clear, healthcare
and public health systems in the United States have limited
excess capacity to treat patients during extreme events (Bein,
et al., 2019). Such events could include, for example, events
stemming from infectious diseases and tropical cyclones
attributable, in part, to climate change (Wu, et al., 2016).
Public health infrastructure in the United States and around
the world has been affected by significant reductions of public
investment in recent decades (Masters, et al., 2017). Unless
this trend is reversed, the U.S. healthcare system may not be
able to cope with the burdens from climate-related physical
risk. For instance, healthcare facilities, networks and
enterprises could face financial challenges associated with the
exposure of highly vulnerable and aging populations subject to
increasing climate-attributed stresses, such as extreme heat
and infectious disease, and shocks, such as stronger hurricanes
and wildfires (Desai, et al., 2019).\4\
\4\ Id. at 17-18.
To maximize the benefits and minimize the costs of a transition to
a clean energy economy, we must act swiftly but thoughtfully. The
---------------------------------------------------------------------------
Report asserts that:
[T]he longer governments wait to adequately cut emissions,
the more rapidly physical and transition risks are likely to
increase in parallel. The physical impacts of climate change
will intensify while the magnitude of the response needed to
arrest further warming grows. The public and private sectors
must simultaneously advance both climate mitigation and
adaptation to effectively manage both physical and transition
risks.\5\
\5\ Id. at 22.
2. Please comment on the expected economic impact that would result
from dramatic action to reduce carbon emissions, relative to the
alternative of not mitigating carbon emissions. For example, what is
the expected effect on GDP growth associated with achieving global net-
zero emissions by mid-century, relative to the alternative of
---------------------------------------------------------------------------
unmitigated global emissions, such as the IPCC RCP8.5 scenario?
The Report notes that dramatically reducing carbon emissions to
limit warming to ``well below'' 2 degrees Celsius would ``. . . boost
total global GDP by 2.5 percent, or 5.3 percent when considering the
avoided climate-related damages relative to the reference case
(maintenance of current plans and policies).'' \6\
\6\ Id. at 104.
3. In your testimony, you discussed the CFTC MRAC report calls for
better understanding, quantification, disclosure, and management of
climate-related risks by financial institutions and other market
participants. What steps should Congress take to enable the development
of common metrics and methodologies to support climate risk reporting
---------------------------------------------------------------------------
and disclosure?
To enable the development of common metrics and methodologies, the
Report suggests that:
Financial regulators, in coordination with the private
sector, should support the development of U.S.-appropriate
standardized and consistent classification systems or
taxonomies for physical and transition risks, exposure,
sensitivity, vulnerability, adaptation, and resilience,
spanning asset classes and sectors, in order to define core
terms supporting the comparison of climate risk data and
associated financial products and services. To develop this
guidance, the United States should study the establishment of a
Standards Developing Organization (SDO) composed of public and
private sector members. Recognizing that this guidance will be
specific to the United States, this effort should include
international engagement in order to ensure coordination across
global definitions to the extent practicable.\7\
\7\ Id. at 70.
4. In addition to directly addressing climate-related risks to
financial sector stability, what steps can Congress take to blunt the
impact of climate-related financial shocks to households and businesses
with the fewest resources to respond, especially in communities that
have been historically marginalized and experienced environmental
---------------------------------------------------------------------------
injustice?
As I stated in my testimony, the Report recognizes that climate
change already has placed disproportionate burdens on low-to-moderate
income households and historically marginalized communities. As a
result, all of the recommendations and the frame of the entire Report
consider impacts on low-to-moderate income households and marginalized
communities. Any policy prescription must not exacerbate existing
inequitable burdens of climate change. This is absolutely critical in
ensuring that any future policy does not make the problem worse. One
approach to blunt the impact of climate-related financial shocks to
these communities is found in recommendations 8.1 and 8.2 of the
Report. These recommendations lean heavily on the opportunities that
emerge from smart climate policy, and from congressional and regulatory
action to spur investment, innovation and economic productivity.
Recommendation 8.1: The United States should consider
integration of climate risk into fiscal policy, particularly
for economic stimulus activities covering infrastructure,
disaster relief, or other federal rebuilding. Current and
ongoing fiscal policy decisions have implications for climate
risk across the financial system.
Recommendation 8.2: The United States should consolidate and
expand government efforts, including loan authorities and co-
investment programs, that are focused on addressing market
failures by catalyzing private sector climate-related
investment. This effort could centralize existing clean energy
and climate resilience loan authorities and co-investment
programs into a coordinated federal umbrella.\8\
\8\ Id. at 116.
If carefully crafted with the recognition that climate change has
posed inequitable burdens, fiscal policy and government programs
correcting market failures can blunt the impact of climate-related
financial shocks. More importantly, these steps can spur economic
growth, job creation, and resilience in the very communities that have
been historically marginalized and have suffered environmental
injustice.
Questions for the Record
Joanna Syroka
Senior Underwriter and Director of New Markets
Fermat Capital Management, LLC
the honorable kathy castor
1. In your testimony, you described how insurance-linked securities
(ILS), including catastrophe bonds, could be harnessed to accelerate
resilient recovery from disasters. Could you please elaborate on some
specific ways that state, local, and other public entities could
further tap into these ILS resources, and how the U.S. federal
government could be a helpful partner to make this happen?
As noted in my testimony, ILS have played an important role in
stabilizing the national insurance market and lowering property
insurance costs for individuals and businesses in the United States.
However, the ILS technology and the inherent benefits of the ILS
marketplace can be applied more broadly and innovatively than they have
been to date in the country.
As illustrated by examples from overseas, ILS can be applied to
areas where insurance doesn't currently exist and to help local and
national governments accelerate disaster recovery for their economy and
for affected communities. While the functions of ILS and traditional
insurance markets are similar, they differ in one key aspect: while
traditional insurance tends to target individual policyholders, ILS
focus on if an event will occur and once it does, payouts can be
distributed in any way that is necessary for an effective, predictable
and early response. This opens up a world of new possibilities where
fully collateralized contingency funds can be rapidly deployed to areas
and communities in need following a catastrophe. To unlock the full
value of such contingency funding, it should be paired with contingency
plans that outline how funds will be programed to facilitate a
resilient recovery, that not only protects livelihoods in the immediate
aftermath but that will also help those affected build back better for
the future.
Investment in early, predictable responses to communities in
disaster-prone regions is expected to be more cost-effective than a
slow and late response that allows a crisis to become acute, and
evidence from the ground increasingly supports this. For example, in
Mexico, FONDEN was established in the late 1990s by the Mexican
government to manage the risk created by natural disasters and to
support emergency relief operations and the rapid rehabilitation of
federal and state infrastructure affected by these adverse events. The
majority of FONDEN funds are spent on the reconstruction of low-income
housing and public infrastructure after disasters. Facilitated by the
World Bank, since 2009 FONDEN has been a regular sponsor of catastrophe
bonds to help finance these response efforts. After nearly a decade and
a half of operation, results indicate that, in the year following the
disaster, municipalities with access to rapidly disbursed FONDEN
disaster funds grew between 2% to 4% more than those without FONDEN.[1]
Overall, with conservative benefit-cost ratios in the range of 1.5 to
3, the evidence shows that FONDEN, including the cost of the
catastrophe bonds it has sponsored, has provided cost-effective
protection from the public service disruptions caused by natural
disasters. Other studies have shown similar net positive multiples that
speak to the overall net positive economic benefit of responding early
rather than late through insurance-like mechanisms.[2]
Many applications, pairing contingency planning with insurance-like
mechanisms to provide contingency financing, can be conceived of in the
United States at the state, local and public entity level to address
the needs of vulnerable communities using the data and information
available today. The U.S. federal government can do much to facilitate
and encourage such innovation. As mentioned in my written testimony,
technical assistance for entities that wish to design such new programs
is a key way in which the federal government can provide support. The
expertise to create deployable public-private partnerships that can
effectively leverage the ILS market for the purposes of accelerated
resilient recovery from disasters exists within the re/insurance and
ILS markets--including within FEMA that has experience with catastrophe
bond issuance--and, critically, within public entities and
international organizations around the world that have pioneered such
approaches and understand how programs should be designed to unlock the
promise of timely and reliable disaster funding. Identifying ways in
which funds of existing or new federal programs could be used to pay
for such technical expertise, and encouraging their use for such a
purpose, would be an important step towards transforming the idea of
effective and timely disaster response using modern financing tools
into an operational reality here in the United States. The Select
Committee's majority staff report, ``Solving the Climate Crisis: The
Congressional Action Plan for a Clean Energy Economy and a Healthy,
Resilient, and Just America'', has many pertinent recommendations on
how federal hazard mitigation programs, recovery programs and
incentives can be aligned and leveraged to this effect.[3]
While much can be done now with the data that already exists,
consistent, reliable, high-quality and actionable climate data and
real-time earth observations are always important to developing better
risk management and mitigation solutions, including ILS applications
that respond more quickly and in a more targeted manner to needs. As
such, the recommendations on actionable climate risk information in the
Select Committee's majority staff report, ``Solving the Climate Crisis:
The Congressional Action Plan for a Clean Energy Economy and a Healthy,
Resilient, and Just America'', are also an important way in which the
federal government can support innovation to harness the potential of
ILS markets to accelerate resilient recovery from disasters.[4]
2. In your testimony, you noted that investors are actively seeking
Environmental, Social, and Governance (ESG) investment opportunities.
Could you please describe some of the obstacles to meaningful ESG
investing, including disagreement over standards and concerns over
``greenwashing'' ? What are some actions that could be taken to
overcome these obstacles to ESG?
At Fermat we believe the ILS asset class is inherently aligned with
positive ESG principles, which makes it somewhat different to other,
more traditional assets classes such as equities and bonds where
investors are either owners of, or lenders to, companies. As a result,
we have experienced an uptick in investor interest in the asset class
in recent years and seen an increased number of ESG-related requests
for information.
As an investment manager, we obviously value accurate, pertinent
and informative disclosures. At Fermat, we prioritize the analysis of
the risk disclosures in ILS submissions in our underwriting and
investment process. As one of the main risks underpinning investments
in the ILS sector is weather risk, quantifying physical climate-related
risks to ILS is a core component of the ILS underwriting and investment
process. For this reason, environmental considerations--the E of ESG--
are closely linked with ILS. For example, every U.S. hurricane
catastrophe bond indicates the risk of the bond both with and without
the impact of factors such as elevated sea surface temperature to
assess the possible effects of climate change on hurricane activity.[5]
These types of analyses and different views allow investors to evaluate
the sensitivity of specific ILS transactions and their portfolios to
potential climate-related changes to hurricane activity. Risk
disclosures, that provide transparent and appropriate data, risk
modelling and sensitivity analyses helpful for establishing a
reasonable bound on the risk of an ILS investment for the risk period
in question, are welcome in our market. Looking forward, as our market
grows, such high-quality disclosures will be even more important. They
will help investors overcome climate change concerns with respect to
deploying more capital to the sector and they will help the market
establish an appropriate price--and provide that critical market
indication--to ILS sponsors for the risks they cede.
Weather-related risk disclosures in general are standard in the ILS
market, as ILS investments specifically target these risks, helping ILS
sponsors manage the consequences of risk events when they occur. Such
disclosures, however, are not standard in other financial markets.
Given the increasing interest in the impact of weather and climate
change on organizations and their operations, there is much know-how
within our market that can be applied to quantifying such risks for
companies, and other private and public entities. As more organizations
begin to identify, quantify and then disclose their weather and climate
risks, we believe the ILS market is also well positioned to help these
entities manage their financial impact.
Speaking more broadly, as an investment manager we observe that
many other investment managers are committed to ESG principles and
increasingly perceive them as imperative inputs into their investment
decision-making process. They are very aware of the risk of
``greenwashing'' and actively seek to avoid such investments and the
negative reputational risk associated with them. We believe the main
obstacle for ESG-oriented investors, therefore, is further transparency
from companies on ESG issues.
references
[1] Source: de Janvry, A., et al., ``Insuring Growth: The Impact of
Disaster Funds on Economic Reconstruction in Mexico'', June 2016, World
Bank, Washington DC. Available online at: https://
openknowledge.worldbank.org/bitstream/handle/10986/24631/
Insuring0growt0nstruction0in0Mexico.pdf?sequence=1&isAllowed=y.
[2] Clarke, D. J., and R. Vargas Hill, ``Cost-Benefit Analysis of
the African Risk Capacity Facility'', Discussion Paper 01292, September
2013, International Food Policy Research Institute, Washington DC.
Available online at: https://ebrary.ifpri.org/digital/collection/
p15738coll2/id/127813.
[3] In particular, see the Reduce Climate Disaster Risk and Costs
(p390) and Accelerate Resilient Disaster Recovery (p401) sections of
the Select Committee's majority staff report, ``Solving the Climate
Crisis: The Congressional Action Plan for a Clean Energy Economy and a
Healthy, Resilient, and Just America''. Available online at: https://
climatecrisis.house.gov/report.
[4] See the Develop and Deploy Actional Climate Risk Information
section (p374) of the Select Committee's majority staff report,
``Solving the Climate Crisis: The Congressional Action Plan for a Clean
Energy Economy and a Healthy, Resilient, and Just America''. Available
online at: https://climatecrisis.house.gov/report.
[5] The IPCC's most recent AR5 report states it is very likely that
anthropogenic forcings have made a substantial contribution to
increases in global upper ocean heat content, and hence SSTs, observed
since the 1970s. Source: ``Fifth Assessment Report of the United
Nations Intergovernmental Panel on Climate Change'', 2014,
Intergovernmental Panel on Climate Change. Available online at: https:/
/www.ipcc.ch/assessment-report/ar5/.
Questions for the Record
Maggie Monast
Director of Working Lands
Environmental Defense Fund
the honorable kathy castor
1. In your testimony, you noted the importance of adopting
conservation practices that improve soil health and build resilience.
EDF's recent report also identifies barriers to financing resilient
agriculture. What are the barriers to loan products that are aligned
with resilient farming practices? What would a loan product that
supports resilience look like?
Environmental Defense Fund (EDF) and multiple other organizations
are working to quantify the farm budget impacts of conservation
practices that build resilience. When evaluated as a multi-year
investment, resilient agricultural practices such as no-till, cover
crops, and extended crop rotations can generate significant financial
benefits to farming operations in the form of cost savings, resilient
crop yields, and diverse income streams. While some costs increase, in
many cases they can be offset by other cost savings and yield
benefits.\i\ When farmers are able to attract additional revenue, the
financial case is even stronger. However, despite the long-term
benefits, the transition period may deter many farmers from adopting
these practices--especially in economically challenging times.
The financial challenges farmers face in the transition to adopting
more resilient practices are made more difficult due to the fact that
farm loan products do not explicitly incorporate the value of resilient
agriculture or support farmers through the transition.\ii\ There are
several ways in which current loan offerings do not align with the
financial attributes of resilient farming practices, and therefore
create challenges for farmer clients that use or are considering
adopting more resilient practices:
Information gaps: First, there is less data
available to lenders on the return proposition of resilient
practices than conventional farming practices, and many lenders
are unaware of the data that does exist. This information gap
disadvantages both farmers and lenders in developing reasonable
projections of the financial impacts of the transition to
resilient practices. Continued efforts to create locally
relevant analyses of the finances of farms that use resilient
practices can help fill that gap, as can lender efforts to
educate themselves on the information that is available.
Short-term focus: The annual nature of many crop
cycles and associated business practices, including annual
operating loans, compels farmers and their financial partners
to focus on short-term cash flow rather than longer-term
profitability and value.\iii\ This has the potential to create
significant blind spots. For example, soil degradation or
mining for nutrients can produce high yields in the short term,
but over the long term such practices undermine crop
productivity and the value of the land asset.\iv\ Similarly,
excess water consumption for irrigation can lead to future
water scarcity and the risk of crop failure.\v\ Last, extended
crop rotations may also cause variability in revenue in the
short term, but greater stability over the long term.\vi\ With
risk and loan assessment conducted on a single-year basis,
short-term risk is given more weight than long-term
stability.\vii\ If success is only defined as the farmer's
ability to repay his or her annual operating loan, farmers and
lenders will miss opportunities to reduce risk and maximize
long-term profitability.
Loan terms do not value resilience: While farmers
who use crop insurance are able to access significantly better
loan terms, farmers who utilize a production-system risk
reduction strategy receive little or no benefits.\viii\ In
addition, lenders do not provide short-term accommodations in
loan terms for farmers who are transitioning to more resilient
practices. Some lenders contend that if farmers increase their
financial health and stability by using resilient practices,
ultimately their lending terms will improve along with the
farm's improved financial performance. However, this is a
lagging indicator and does not support farmers in navigating
the transition so that they can arrive at the better outcome.
Farmers face an additional barrier to conservation adoption
when they cannot partner with their lenders to plan for the
transition period and take a multi-year view of conservation
investments.
Agricultural lenders in the U.S. do not currently collect financial
data specific to resilient practices, incorporate the risk-reduction
potential of resilient farming practices into their risk ratings, or
design programs or products to support farmers in managing the
transition to practices that improve resilience. Some in the lending
sector may ask why such changes are needed, when many farmers currently
finance their conservation expenses with existing loan products. While
this is true, it is also true that existing products were developed
with conventional farming practices in mind and are not designed to
support farmers in overcoming the unique financial characteristics of
the adoption of resilient farming practices. As such, this places the
onus of navigating the existing loan products and structures on the
farmer who desires to increase resilience. This disconnect creates a
structural disincentive to change, and contributes to persistently low
conservation adoption levels. Ultimately, this results in sub-optimal
outcomes both for farmers and for lenders seeking the best risk-
adjusted return.
On the other hand, there are market opportunities for lenders who
engage with their farmer clients who are interested in resilient
practices and seek to meet their needs. There are several examples of
existing lender initiatives and programs that can inform efforts to
develop programming or products that support farmer adoption of
resilient farming practices. These include programs for Young,
Beginning and Small Farmers \ix\ and recently launched organic
transition loans.\x\
Loan products that support resilience should be designed using the
following five lessons, identified by EDF through extensive interviews
with agricultural lenders and other experts:
Lesson 1: Understand the financial benefits of and
barriers to resilient agricultural practices. Lenders should
understand the benefits of resilient agriculture so that they
can effectively serve their current borrowers and don't let
unfamiliarity with conservation practices discourage farmers or
increase barriers to lending. Lenders should also improve their
understanding of the return profile of transitions to resilient
agriculture, including the benefits, barriers, and the
transition timeframe in order to identify farmer needs or
market gaps that could be addressed with new or modified loan
products. Agricultural lenders do not currently collect
information from farmer clients that gives them the level of
detail needed to assess this, but organizations working to
quantify the financial impact of conservation adoption on farm
budgets can provide useful information on the type and
magnitude of potential costs, savings and crop yield impacts.
Lenders can collaborate with those organizations to provide
feedback on the type of information needed to inform their
decision-making.
Lesson 2: Design loan structures and requirements to
correspond with the financial characteristics of the resilient
practice(s). Lenders may select a subset of resilient farming
practices particularly suited to their region or desired by
local farmers. Based on their understanding of the financial
shift that is taking place (e.g. any upfront costs or yield
impacts, how cost savings and yield benefits occur over time),
they should consider how to shift the requirements of the loan
to accommodate those expected changes. For example, lenders
could consider modifying the length of the loan or utilizing a
longer planning horizon with streamlined loan renewals,
relaxing some credit standards in the first few years of the
transition, or reducing the interest rate to encourage farmer
uptake.
Lesson 3: Loan support may be needed to launch
initial products and should be used to prove the financial
case. If it is difficult to make a loan product acceptable for
the lender and meet the needs of the farmer at the outset due
to insufficient data on the return proposition, then loan
support can be used to bridge the gap. Loan support is when a
partner (corporate partner, investor, philanthropic or public
source) provides additional financial risk-sharing to make the
overall loan package work for both the lender and the farmer.
An important role for loan support is to create examples and
track records to build on, and to support data collection in a
product pilot phase in order to prove the financial hypothesis
for the product to stand on its own. Loan support can take many
different forms, including production contracts, loan
guarantees, subordinated debt, and more.
Lesson 4: Collect data on financial and
environmental performance to show results, fine-tune loans and
adjust credit rating processes. While external financial
support may be necessary to launch new or modified loan
programs for resilient agriculture, such support should be
utilized to test a loan product that can ultimately stand on
its own from a financial standpoint. For this to occur, data
collection on both the financial and environmental performance
of the farm and the loan is essential. This is another area
where collaboration can prove useful to the lender, whether it
is with an environmental or agricultural organization that can
advise on appropriate environmental metrics, or an agriculture
technology provider that can assist in data collection and
analysis. This data can enable a positive feedback loop for
continuous improvement, both for individual farmers as well as
the lenders' overall view of its portfolio and products. As
lenders build a knowledgebase from empirical data around
resilient practices and results, they can modify credit rating
processes to incorporate this data. Ultimately, the objective
is to accurately demonstrate the value of resilient farming
practices and integrate these results into lender policies and
pricing for farmers who implement practices that build
resilience in their operations.
Lesson 5: Consider other forms of support farmers
may need to ensure successful practice adoption--and avoid
creating new burdens. Additional support could take the form of
financial arrangements, such as grain offtake agreements or
cost-share for conservation expenses, or educational support,
such as agronomic advice on how to incorporate new practices
into farms' existing management systems. Some of these forms of
support can be offered by lenders, while others may need to be
part of a broader program with partners. For example, while
some degree of trial and error will nearly always be required
to integrate new practices to a farming operation, technical
assistance and education can support farmers in moving up the
learning curve. In addition, creating a financial plan for the
transition can help both parties set realistic expectations and
then continue to check in on whether changes to the farm's
finances are occurring as planned. Finally, for a new or
modified lending product to be used, it should avoid creating
burdensome new requirements for farmers and should have terms
that are competitive with other offerings in the market.
More information on these barriers and opportunities can be found
in EDF's report, Financing Resilient Agriculture: How agricultural
lenders can reduce climate risk and help farmers build resilience.
2. Your testimony noted the gaps in information and data as a
barrier to financing resilient agriculture. What should Congress do to
bridge data gaps, and how can federal agencies like USDA do a better
job coordinating their data collection and delivery to guide climate-
smart finance in the agricultural sector?
We agree with the House Select Committee on the Climate Crisis'
Majority Staff Report, Solving the Climate Crisis, on its
recommendation for Congress to incentivize standardized data collection
to demonstrate the reduced risk and profitability benefits of
conservation practices. While many studies analyze farmer budgets and
other relevant data sources, there is a critical need to expand such
analysis and connect it to the type of information required by
agricultural lenders and crop insurers for decision-making and risk
analysis. For example, farm-level data on conservation practice
adoption, costs and profitability, crop yields and weather risk are all
needed to better understand the financial benefits and barriers of
resilient agriculture. However, numerous disparate systems (e.g., on-
farm equipment vs. satellites) generate these data in non-standardized
formats (e.g., survey, census, transactional records, market prices).
Further, the data are managed by different government agencies,
universities, and private firms, who each have their own standards,
definitions, and privacy guidelines. In many cases, researchers need
permission and a pathway to access, interpret, and integrate disparate
data from multiple systems.\xi\
Environmental Defense Fund is a member of the AGree Economic and
Environmental Risk Coalition, which includes researchers, academics,
producers, former officers of the U.S. Department of Agriculture
(USDA), and non-profit environmental and agricultural
organizations.\xii\ The AGree Coalition has found that increased
integration and analysis of USDA's vast resource of agricultural data
is a proven strategy for delivering key research insights needed to
advance innovation in the food and agriculture sector. USDA has several
opportunities to act to improve data innovation and research, both
internally at the agency and externally with partners, but has not
moved quickly without Congressional direction and support.
USDA has started this work by creating a system of internal data
dashboards for USDA Mission Areas. This shared, internal USDA platform
makes data available across office leadership to inform decision-
making. This system has increased USDA's capacity to generate important
insights, developed through analysis of robust data sets, across the
agency. We ask that Congress support USDA to continue this work and
extend it to all Mission Areas across the agency. Congress should
encourage USDA to expand the scope of these data dashboards to
incorporate more types of data for the purposes of research, in
addition to organizational decision-making.
USDA can also support new and innovative research by land-grant
universities using the agricultural data it collects. Section 1619 of
the 2008 Farm Bill allows the sharing of USDA agricultural data with
land grant institutions for the purposes of technical assistance.
Congress should direct USDA to immediately begin establishing
agreements with researchers to answer key research questions related to
the agency's production and environmental goals. This expanded research
capacity will help to create the strong scientific basis to drive
innovation forward. These innovations in data sharing and analysis can
be executed in a way that prioritizes data security and protects
producers' personally identifiable information.
There are also opportunities to spur public-private collaboration
in data interoperability--including data standardization and
aggregation at scale, and crosscutting analyses that can deliver
insights that each disparate set of data cannot on its own. For
example, data collected by agricultural technology companies can be
integrated with public data sources to enhance the decision-making of
farmers, agricultural lenders, crop insurers, policymakers, and other
key stakeholders. This broader data set could be analyzed by a publicly
available analytics platform that could generate the same insights that
private software providers offer behind pay walls.
An important point of caution in this area is to avoid relying
entirely on data sources that exclude small farmers and farmers of
color. For example, farm management software solutions are more
commonly available to and used by large-scale farmers; small farmers
and farmers of color are not as likely to utilize this
technology.\xiii\ The path forward to demonstrate the reduced risk and
profitability benefits of resilient agriculture will require methods to
assess the financial performance and resilience of farms of all types
and sizes, and an openness to learn from a variety of different
operations. An important role for Congress and the Administration is to
support the advancement of data-driven decision-making capabilities
that are critical to understanding and planning for climate resilient
agriculture, in ways that are inclusive of the needs and expertise of
small farmers and farmers of color.
There is a well-recognized need to establish and quantify risk and
conservation practices at scale and incorporate them into policy,
insurance, lending, and conservation programs.\xiv\ The advances in
data coordination and analysis described above would represent
important progress towards equipping researchers, government agencies
and the private sector to do so.
references
\i\ Monast, Maggie and KCoe Isom AgKnowledge. (2018). Farm Finance
and Conservation: How stewardship generates value for farmers, lenders,
insurers and landowners. Retrieved from: https://edf.org/farm-finance.
\ii\ Monast, Maggie. (2020). Financing Resilient Agriculture: How
agricultural lenders can reduce climate risk and help farmers build
resilience. Retrieved from: https://edf.org/aglending.
\iii\ Personal communication, agricultural lender PD, October 2019.
\iv\ Eswaran, H., R. Lal and P.F. Reich. 2001. Land degradation: an
overview. In: Bridges, E.M., I.D. Hannam, L.R. Oldeman, F.W.T. Pening
de Vries, S.J. Scherr, and S. Sompatpanit (eds.). Responses to Land
Degradation. Proc. 2nd. International Conference on Land Degradation
and Desertification, Khon Kaen, Thailand. Oxford Press, New Delhi,
India. Accessed at: https://www.nrcs.usda.gov/wps/portal/nrcs/detail/
soils/use/?cid=nrcs142p2_054028.
\v\ Council for Agricultural Science and Technology (CAST). (2019).
Aquifer Depletion and Potential Impacts on Long-term Irrigated
Agricultural Productivity. Issue Paper 63. CAST, Ames, Iowa. Retrieved
from https://www.cast-science.org/wp-content/uploads/2019/02/CAST-IP63-
Aquifer-Depletion.pdf.
\vi\ Bowles et al. Long-Term Evidence Shows that Crop-Rotation
Diversification Increases Agricultural Resilience to Adverse Growing
Conditions in North America. One Earth 2, 284-293, March 20, 2020.
\vii\ Personal communication, Scott Marlow, Long Rows Consulting.
July 2020.
\viii\ Woodard, J. & Marlow, S. (2017, April). Crop Insurance,
Credit, and Conservation. The AGree Economic and Environmental Risk
Coalition. Retrieved From: https://foodandagpolicy.org/wp-content/
uploads/sites/4/2019/09/2017-April-Crop-Insurance-Credit-and-
Conservation.pdf.
\ix\ Pellett, Nancy. (2007, August 10). Revised Bookletter 040--
Providing Sound and Constructive Credit to Young, Beginning, and Small
Farmers, Ranchers, and Producers or Harvesters of Aquatic Products.
Retrieved from: https://ww3.fca.gov/readingrm/Handbook/_layouts/15/
WopiFrame.aspx?sourcedoc=(788991C0-7E8B-43AC-ADB4-
55C500B85A94)&file=BL-040%20REVISED.docx&action=default.
\x\ Rabo AgriFinance. (2019, October 24). ``Rabo AgriFinance
Designs Industry's First Organic Transition Loan Offering.'' Retrieved
from: https://www.raboag.com/news/rabo-agrifinance-designs-industrys-
first-organic-transition-loan-offering-54.
\xi\ Woodard, J. et al. (2019). Harnessing the Power of Data to
Improve Agricultural Policy and Conservation Outcomes. Choices, 34(3),
1-7. Retrieved from: https://foodandagpolicy.org/wp-content/uploads/
sites/4/2019/10/cmsarticle_706.pdf.
\xii\ AGree Economic and Environmental Risk Coalition. Retrieved
from: https://foodandagpolicy.org/.
\xiii\ McDonald, J., Korb, P., Hoppe, R. (2013, August). Farm Size
and the Organization of U.S. Crop Farming. U.S. Department of
Agriculture Economic Research Service. Retrieved from: https://
www.ers.usda.gov/webdocs/publications/45108/39359_err152.pdf.
\xiv\ Woodward et al. 2019.