The Federal Reserve has taken another step forward in efforts to ensure that the financial system is protected from climate risks.
As the central bank draws more and more attention to the issue, the Fed has set up a climate stability committee and a climate oversight committee.
The panels will focus on “the potential for complex interactions across 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 the broader financial system. A second core pillar of our framework is therefore aimed at addressing the macro-financial risks of climate change,” Brainard added.
The Monitoring Climate Committee will focus on identifying risks and compiling a program to address them. The Climate Stability Committee on Financial Stability will address ‘macro-prudential risks’ to how climate systems may pose systemic risks to the institutions overseen by the Fed.
While tackling the climate issue represents a broadening of the Fed’s role in overseeing banks and other financial institutions, officials have highlighted the potential detrimental effects that weather-related events could have on the system.
The central bank has started asking large institutions to assess the potential impact of climate change and how they are prepared to withstand important events. Brainard was the first Fed official to start talking about the issue and said in late 2019 that she wanted her colleagues to consider how climate events could affect monetary policy.
“Financial market participants who do not put in place frameworks to assess and address climate-related risks can experience significant losses on climate-sensitive assets due to shifts in the environment, through a disorderly transition, or both,” Brainard said.
She added that ‘robust risk management’ across a number of areas ‘could help ensure that the financial system is climate-resistant and well-positioned to support the transition to a sustainable economy.’
However, the movement to address climate change has received some backlash from Republicans in Congress, who are worried that the Fed is exceeding its current mandate.
Fed Chairman Jerome Powell raised questions about the central bank’s involvement during a hearing before the House Financial Services Committee on Tuesday.
Powell, for his part, has indicated that climate change is not central to the Fed’s mission, but is nevertheless important.
“It’s really very early days to try to understand what all this means. It could clearly have long-term consequences 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 understand the risk.
Powell said research into the impact of climate change is part of making sure institutions are ‘resilient’ in the face of risks.