The Federal Reserve has taken another step forward to ensure that the financial system is protected from climate risks.
As the central bank increasingly turns its attention to the issue, the Fed has set up a climate committee for financial stability and a climate supervisory committee.
The panels will focus on “the potential for complex interactions in the financial system,” Fed Governor Lael Brainard said in a statement on Tuesday.
“Climate change and the transition to a sustainable economy also pose risks to the stability of the broader financial system. Thus, a second core pillar of our framework is aimed at addressing the macro-financial risks of climate change,” added Brainard.
The Climate Monitoring Committee focuses on identifying risks and compiling a program to address them. The Climate Committee on Financial Stability will consider “macroprudential risks” for how the climate could pose systemic risk for the institutions overseen by the Fed.
While tackling the climate issue broadens the Fed’s role in overseeing banks and other financial institutions, officials have stressed that weather conditions could potentially be damaging to the system.
The central bank had begun to ask large institutions to assess the potential impact of the climate and how they are prepared to weather major events. Brainard was the first Fed official to raise the issue, saying in late 2019 that she wanted her colleagues to start thinking about how climate events might affect monetary policy.
“Financial market participants who have not put in place frameworks to assess and address climate-related risks could suffer significant losses on climate-sensitive assets as a result of shifts in the environment, a disorderly transition, or both,” said Brainard.
She added that “robust risk management” in a number of areas “can help ensure that the financial system is resilient to climate-related risks and well positioned to support the transition to a sustainable economy.”
However, the movement to tackle climate change has received some backlash from congressional republicans, who are concerned that the Fed is exceeding its existing mandate.
During a hearing Tuesday before the House Financial Services Committee, Fed Chairman Jerome Powell was asked whether the central bank should be involved in the matter.
Powell, for his part, has pointed out that climate change is not central to the Fed’s mission, but is nonetheless important.
“It’s really early to try to understand what all this means. It clearly could have longer-term implications for our economy, our financial system and the people we all serve,” Powell said. “It’s early days, but we feel we have a responsibility to start the process of understanding ‘the risk’.
Powell said research into the impact of climate change is part of ensuring that institutions are “resilient” to risk.