The Fed is taking a step that points to an increasing focus on the risk of climate change

Federal Reserve Chairman Jerome Powell prepares for a House Financial Services Committee hearing on “Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response” at the Rayburn House Office Building in Washington, DC on December 2, 2020.

Jim Lo Scalzo | Reuters

The Federal Reserve has taken a step that confirms its nod to the risk of climate change to the financial system.

In a statement released Tuesday, the central bank said it has formally joined a global peer group addressing the impact of the climate on finances. The network of central banks and regulators for greening the financial system, as it is called, was established in 2017 and now has 83 members from all over the world. The US had been an informal participant for over a year.

“As we gain a better understanding of how best to estimate the impact of climate change on the financial system, we look forward to continuing and deepening our discussions with our … colleagues around the world,” said Jerome H. Powell, Chairman of the Federal Reserve Board. a statement.

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The issue of climate change has become a more pronounced topic at the Fed, in light of the ongoing trend of higher mean temperatures and environmental changes such as rising sea levels and more frequent severe weather events.

For example, in its most recent financial stability report, the Fed first examined climate change and said, in part, “Federal Reserve regulators expect banks to have systems in place that correctly identify, measure, control and monitor all of their business. , which for many banks are likely to be extended to climate risks. “

The translation is that if those hazards are not taken into account, hazards such as storms, floods, droughts or forest fires can suddenly change the value of assets, shocking the system.

At this point, it is uncertain how the Fed’s participation in the global network will affect policy and regulation. While Democrats had pushed for membership, nearly 50 Republican lawmakers in Congress sent a letter to the Fed last week asking it to slow down and avoid pursuing proposals elsewhere that would require banks to account for climate change in stress tests. (Those tests are generally a way for regulators to assess a bank’s financial soundness by requiring them to run what-if scenarios).

The letter also expressed concern that introducing climate change aspects into those measurements could have a chilling effect on banks’ willingness to lend to industries such as coal, oil and gas.

However, the move was welcomed by the non-profit organization Ceres Accelerator for Sustainable Capital Markets.

“This news … is a clear indication that the agency recognizes its role in addressing the systemic risk of climate change,” Steven Rothstein, the group’s general manager, said in a statement.