Fed makes move that signals growing attention to climate change risk

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Federal Reserve Chairman Jerome Powell prepares for a House Financial Services Committee hearing on “Treasury Department and Federal Reserve pandemic response monitoring” at the Rayburn office building House in Washington, DC, December 2, 2020.
Jim Lo Scalzo | Reuters
The Federal Reserve has made a move that cements its nod to the risk climate change could pose to the financial system.
In a statement released on Tuesday, the central bank said it has officially joined a global peer group that deals with the impact of climate on finance. The Network of Central Banks and Supervisors for Greening the Financial System, as it is known, was formed in 2017 and now has 83 members from around the world. The United States had already been an informal participant for over a year.
“As we develop our understanding of how best to assess 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 the President of the Federal Reserve, Jerome H. Powell. A declaration.

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The issue of climate change has become a more pronounced topic at the Fed, in light of the continuing trend of higher average temperatures and environmental changes such as sea level rise and more frequent weather events.

For example, in its most recent Financial Stability Report, the Fed first explored climate change, stating, in part: “Federal Reserve supervisors expect banks to have systems in place. that appropriately identify, measure, control and monitor all of their material risks, which for many banks are likely to extend to climate risks. ”

The translation is that if these dangers are not taken into account, dangers such as storms, floods, droughts or forest fires could change the value of assets suddenly, causing shock to the system.

At this point, it is unclear how the Fed’s participation in the global network will affect policy and regulation. As Democrats urged membership, nearly 50 Republican congressional lawmakers sent a letter to the Fed last week asking it to slow down and avoid following proposals elsewhere that would force banks to consider the change. climatic in stress tests. (These tests are typically a way for regulators to assess a bank’s financial strength by forcing them to run what-if scenarios.)

The letter also expressed concern that the introduction of climate change aspects in these measures could have a chilling effect on the willingness of banks to extend credit to industries such as coal, oil and gas.

However, the move was applauded 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, group chief executive, said in a statement.

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