The Federal Reserve has taken another step forward in its efforts to ensure that the financial system is protected from climate risks.
As the central bank turns its attention to this issue, the Fed has set up a Financial Stability Climate Committee and a Climate Supervision Committee.
The groups will focus on “the potential for complex interactions in the financial system,” Fed Governor Lael Brainard said Tuesday.
“Climate change and the transition to a sustainable economy also pose risks to the stability of a wider financial system. So a second central pillar of our framework is to address the macro-financial risks of climate change,” Brainard added.
The Climate Monitoring Committee will focus on identifying risks and developing a program to address them. The Climate Financial Stability Committee will address “macro-prudential risks” for how climate could pose systemic risks to the institutions the Fed oversees.
While addressing the climate issue is an extension of the Fed’s role in overseeing banks and other financial institutions, officials stressed the potentially damaging impact that weather events can have on the system.
The central bank has begun asking large institutions to assess the potential impact of the climate and how they are prepared to withstand significant events. Brainard was the first Fed official to start talking about the issue, saying in late 2019 that she wants her colleagues to start looking at how climate events could impact monetary policy.
“Financial market participants who do not implement frameworks to assess and address climate risks could face significant losses on climate change-sensitive assets caused by environmental change, a disorderly transition, or both,” Brainard said.
She added that “robust risk management” in several areas “can help ensure that the financial system is resilient to climate risks and is well positioned to support the transition to a sustainable economy”.
However, the climate change movement has received some push from Republicans in Congress, who fear the Fed is outdating its existing mandate.
At a hearing on Tuesday before the House Financial Services Committee, Fed Chairman Jerome Powell faced questions about whether the central bank should be involved in the issue.
For his part, Powell said climate change is not essential to the Fed’s mission, but it is important.
“It’s really very early to try to understand what all this means. Clearly, it can have longer-term implications for our economy, our financial system and the people we all serve,” Powell said. “These are the first days, but we feel we have a responsibility to begin the process of understanding” the risk.
Powell said examining the impact of climate change is part of ensuring that institutions are “resilient” to risk.