Reducing Climate Risk Impact to Vulnerable Communities

In our previous article in this series, we covered likely changes to the regulatory landscape as a result of the Biden administration’s attempts to combat the effects of climate change, as set forth in both President Biden’s A Roadmap to Build a Climate-Resilient Economy and the subsequent Report on Climate-Related Risk from the Financial Stability Oversight Council (FSOC). In this article, we will focus specifically on the administration’s consideration of the impact climate change will have on vulnerable communities.

Disproportionate Impact of Climate Change on Disadvantaged Populations

Although the Biden administration’s roadmap is focused on the economy as a whole, the administration acknowledged that its efforts must afford critical support to disadvantaged communities, which are more vulnerable to both the physical and transition risks of climate change. The roadmap cited examples of the disproportionate impact of climate change, such as lack of access to affordable cooling systems, critical to prevent heat-related deaths, among vulnerable populations. Another example is the prevalence of low-income workers in carbon-intensive industries that will see decline as the world shifts to a low-carbon economy.  The FSOC report expanded on the roadmap, noting that the adverse effects of climate change, as well as actions to address climate change, could have long-term impacts that exacerbate already existing inequities.

Policy Considerations 

Protecting these communities as the economy transitions to net zero will require ongoing effort and consideration. As the US strategy evolved, however, the roadmap described actions it had already taken, such as the Justice40 initiative, which seeks to ensure that 40% of the benefits of federal investments in climate infrastructure and clean energy are delivered to disadvantaged communities. It also committed to take steps to protect these communities from transition risks, noting its creation of the Interagency Working Group on Coal and Power Plant communities and Economic Revitalization, which will ensure investment to support those hit hardest by the clean energy transition. The FSOC likewise committed to the development of balanced policy solutions that will take into consideration the disproportionate impact climate change is likely to have on historically disadvantaged and low-income communities.

Given the administration’s acknowledgment of, and commitment to address, the unequal impact of climate change on marginalized communities, financial regulators currently focused on enhancing climate-related requirements will likely be grappling with the challenge of safeguarding the financial system from climate-related risk, while also ensuring the costs of climate change do not fall on those who are least equipped to bear them.

In the next climate risk series post, we explore implications and potential risk to insurance companies.