Climate change is already imposing substantial economic costs and is projected to have a profound effect on the economy at home and abroad, a member of the Federal Reserve Board said Thursday.
In remarks to a conference on climate finance sponsored by the Institute of International Finance, Gov. Lael Brainard said future financial and economic impacts will depend on the frequency and severity of climate-related events and on the nature and the speed at which countries around the world transition to a greener economy.
“Climate change and the transition to a low-carbon economy create both risks and opportunities for the financial sector,” Brainard said. “Financial institutions that do not put in place frameworks to measure, monitor, and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy, or by a combination of both.
“Conversely, robust risk management, scenario analysis, and forward planning can help ensure financial institutions are resilient to climate-related risks and well-positioned to support the transition to a more sustainable economy.”
She said the Fed is already seeing financial institutions responding to climate-related risks. She said those are illustrated by encouraging borrowers to adapt to and manage the risks associated with a changing climate, responding to investors’ demands for climate-friendly portfolios, and funding critical private-sector initiatives to move toward more climate-friendly business models.
“As noted by members of our Federal Advisory Council,” she said, “there has been increasing awareness among financial institutions of the need to define and develop risk management frameworks that incorporate these climate-related financial risks into strategic decision making on multiple levels, including investment approaches and the long-term structuring of portfolios.”
The Fed governor said financial institution supervisors have a responsibility to ensure that financial institutions are resilient to all material risks – including those related to climate change – both currently and into the future.
“It is essential that financial institutions – and the financial sector as a whole – are resilient to and prepared for the challenges of climate change,” Brainard said. She noted a recent survey of central banks that found a large majority view it as appropriate “to act within their existing mandate to mitigate climate-related financial risks” that “could potentially impact the safety and soundness of individual financial institutions and could pose potential financial stability concerns for the financial system.”