The US central bank will invest in research and modeling to understand how climate events can threaten the economy.
The Federal Reserve plans to make climate change an important part of its monitoring on Wall Street by creating a new committee that will identify and respond to the dangers that a warming planet poses to the financial system.
The Financial Stability Climate Committee will be “responsible for developing and implementing a program to assess and address climate-related risks to financial stability,” Fed Governor Lael Brainard said in a statement. speech delivered on Tuesday. The central bank is investing in research and modeling to understand how climate events can threaten businesses and the economy at large, which it admitted could be a challenge.
The committee will coordinate with the multi-agency Financial Stability Supervisory Board, which is charged with preventing emerging risks that could trigger another financial crisis. “Climate change can be seen as similar to other financial stability shocks emanating from outside the financial system, such as COVID-19, which are difficult to predict with precision,” Brainard said in remarks delivered in line at a conference organized by Ceres.
Fed Chairman Jerome Powell also addressed global warming during a hearing Tuesday before the House Financial Services Committee.
“This can clearly have long-term implications for our economy, for our financial system, and for the people we all serve,” Powell told lawmakers. “Our obligation is to try to understand this,” he said, adding that the biggest banks are already “very active in trying to understand how climate change would affect their business in the long term”.
Brainard said it was particularly difficult to prepare for climatic “tipping points”, which can disrupt weather conditions, water supplies and livability in large areas. This means that “even well-informed investors might underestimate the likelihood of significant climate change-related shocks, resulting in a systematic poor assessment of risk,” she said.
The new committee will join another recently formed group at the central bank, the Climate Watch Committee, which focuses more directly on climate issues affecting the individual institutions that the Fed oversees. The agency also recently joined the network of central banks and supervisors for the greening of the financial system.
The Fed is not the only one to react. Since the start of the Biden administration, the Securities and Exchange Commission and the Commodity Futures Trading Commission have also created new units to focus on climate change. The heads of the two financial regulators are members of the FSOC.
“It’s time to act, and we really need to start acting collectively,” CFTC Acting Chairman Rostin Behnam said at the Ceres event.