Fed Board joins global network focused on financial sector environment, climate risk management

The nation’s central bank has formally joined the Network of Central Banks and Supervisors for Greening the Financial System, or NGFS, a group of central banks and supervisory authorities formed in 2017 that supports the exchange of ideas, research, and best practices on the development of environment and climate risk management for the financial sector.

The Fed Board began participating in NGFS discussions and activities more than a year ago, according to an announcement by the Fed Tuesday. “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 NGFS colleagues from around the world,” said Federal Reserve Board Chair Jerome H. (“Jay”) Powell.

The Fed, as part of the international Financial Stability Board (currently chaired by Fed Vice Chair for Supervision Randal Quarles), signed onto an FSB report in November identifying climate change (featuring rising global temperatures, sea level rise and more, as noted in further explanation in the report) as a near-term risk for the financial system.

“Climate change adds a layer of economic uncertainty and risk that we have only begun to incorporate into our analysis of financial stability,” according to the FSB report. It notes that climate change raises the likelihood of dislocations and disruptions in the economy, which is likely to increase financial shocks and financial system vulnerabilities that could further amplify those shocks.

“Acute hazards, such as storms, floods, droughts, or wildfires, can quickly alter, or reveal new information about, future economic conditions or the value of real or financial assets,” the report states. “Moreover, in the presence of rapid shifts in public perceptions of risk, chronic hazards (like a slow rise in sea levels) have the potential to produce similar abrupt repricing events. These repricing events and direct losses associated with climate hazards can result in an increased frequency and severity of financial shocks; the timing and repercussions of these shocks are difficult to predict in advance.”

The NGFS, in a report issued this month, said a survey of NGFS members show that central banks “clearly acknowledge the potential threat to the economy posed by climate change and share increased awareness of its impact on central bank operational frameworks.”

That report said a majority of respondents are considering climate-related measures in general terms, though implementation of specific measures in operational frameworks “is currently still at a very early stage.”

It said many respondents view international coordination as “key to facilitating the integration of climate risks into central banks’ operational frameworks.” The group’s members recognize the need for consistent, comparable, and reliable climate risk data, the report said, and consider an intensified exchange of experiences “essential to overcome operational difficulties on the path towards reflecting climate-related risks in central banks’ monetary policy frameworks.”

Federal Reserve Board announces it has formally joined the Network of Central Banks and Supervisors for Greening the Financial System, or NGFS, as a member

Financial Stability Report (November 2020)

NGFS technical document – Survey on monetary policy operations and climate change: key lessons for further analyses (December 2020)