On October 21, the Financial Stability Oversight Council (FSOC) declared climate change an emerging threat to financial stability. FSOC’s report comes at an important moment, as US domestic climate policy is mired in conflict during the COP26 meeting in Glasgow, and as international peers have already pulled ahead of the US in financial climate risk regulation. This blog post responds to one important issue raised by the report: the need for open data in climate-related financial risk analysis.
For context, FSOC was established after the 2008 financial crisis and is tasked with monitoring threats to the U.S. economy, like those that sparked the Great Recession. The council is comprised of the heads of leading financial regulators, including the Securities and Exchange Commission (SEC), the Federal Housing Finance Agency (FHFA), and the Federal Reserve; the Council is chaired by the Secretary of the Treasury, and supported by Treasury’s Office of Financial Research (OFR). Through FSOC, these regulators come together to share information and collectively oversee the stability of the US financial system.
The council's “emerging threat” declaration came in the form of a new report that identifies actions each FSOC member has taken so far on climate related financial risks, and offers recommendations for agencies to consider going forward. Climate-related financial risks include threats to the economy and financial markets from either the direct impacts of climate events (known as physical risks), or the changes in the economy needed to decarbonize (known as transition risks). In tandem with the report’s release, the council also announced the establishment of two new climate risk committees, one at the staff level and one that will act as an expert advisory body.
Why open data matters
A major theme in FSOC’s report is the importance of data and analytics for understanding climate-related financial risks, which are quantified by integrating climate, financial, and economic data. Key challenges include a lack of linkages between relevant datasets, and the lack of a common language for organizing and interpreting different kinds of data — many of which are produced by experts operating in distinct areas of technical expertise, often with different definitions of key statistical and conceptual issues of relevance to FSOC’s work.
Data infrastructure and accessibility also present barriers. While the federal government and some academic institutions provide high quality climate data resources, private vendors currently work to fill gaps and translate raw climate data into formats that are more usable for companies’ proprietary financial and economic analysis. As the FSOC report notes, these third-party vendors are costly and can be limited in scope. This means that accessing climate-related risk data remains an expensive proposition, both in terms of the required personnel and financial resources.
Open source options for climate-related financial risk analysis aren’t yet widely available, although the report points to one effort that does not yet offer a public product. This situation is concerning because when climate-related financial risk data is expensive, fewer organizations and people have access to it. As the FSOC report explains in detail, climate risks affect our entire economy, from critical infrastructure like energy systems and roads, to homeownership, and retirement savings. If climate-related risk disclosure and management is going to transform the financial system, then everyone who participates in that system is affected by it and has an interest in the accurate and equitable application of climate risk analysis. But expensive private data limits the availability of critical information — if not for the biggest and most sophisticated players, then at least for those without the resources and capacity to match their understanding.
Open data and open source tools are also needed so that the scientific community and the financial sector can monitor, validate, and converge on best practices for risk analysis. The FSOC report points to a need to build bridges between different disciplines, datasets, and emerging methodologies. Private, black-box vendors and a reliance on proprietary datasets hinder this goal, and holds back the potential to improve risk analysis informing financial decisions.
How FSOC can help
Despite the clear need for more open data and tools, open climate-related financial risk data and analytics remain a rarity. We were encouraged to learn that the FSOC report acknowledges the problem and identifies possible solutions. Recommendation 1.5 states:
We were excited to read FSOC’s new report and hope that its member agencies will adopt this recommendation in full. We also hope FSOC and its member agencies will engage open science practitioners in the research community to support the development of a robust risk management paradigm going forward.