Climate change, its impact on financial stability, will be focus of two new Fed committees

In more muscular approach to climate change, Fed also investing in new research, data, modeling

Two new committees will focus on the impact of climate change on financial stability, a Federal Reserve Board governor said Tuesday, as the agency finds it “increasingly clear” that climate change could have “important implications” for the agency in carrying out its responsibilities.

Lael Brainard spoke to the Ceres 2021 Conference in Boston, via webcast. The Ceres group describes itself as a “sustainability nonprofit organization” working with investors and companies to build leadership and drive solutions throughout the economy, particularly on issues such as climate change, water rights, racial and gender inequality and other issues.

The Fed governor said the new Supervision Climate Committee (SCC) will address the microprudential side by strengthening the agency’s ability to consider climate change risk and develop an “appropriate program to ensure the resilience of our supervised firms” to the risks posed.

The second committee – the Financial Stability Climate Committee (FSCC) – will, Brainard said, identify, assess, and address climate-related risks to financial stability through a macroprudential approach (one that considers the potential for “complex interactions across the financial system,” she said). In that regard, she added, it will complement the work of the SCC.

She said both committees address two pillars of the agency’s framework for addressing the economic and financial consequences of climate change.

“Microprudential and macroprudential objectives are often aligned,” she asserted. “For example, consistent disclosures are important not only to enable individual financial firms to measure and manage their exposure to climate-related financial risks, but also to support financial stability more broadly by helping the market to accurately price that risk. Given the importance of consistent, comparable, and reliable disclosures to financial stability and prudential objectives, mandatory disclosures are ultimately likely to be important.”

But both goals may not fully align in all circumstances, she said, so that it is important to consider the implications both for individual firms’ safety and soundness and also for the broader financial system. “For example, the use of climate-related risk mitigants such as insurance or financial derivatives may shift risk away from a particular financial institution but may not reduce or eliminate risk from the system as a whole,” she said. “In developing a framework to address climate-related financial risks, we need to be mindful of this cascade of effects and the implications across the Federal Reserve’s range of responsibilities.”

Brainard said the new FSCC is a “systemwide committee” charged with developing and implementing a program to assess and address climate-related risks to financial stability. The broad goals of the FSCC, she said, are to promote the resilience of the financial system to climate-related financial risks, ensure coordination with the Financial Stability Oversight Council (FSOC), and increase the Fed’s international engagement and influence on this issue.

The FSCC, she said, would work closely with the other committee (the SCC) to build a coordinated approach to integrating climate-related risks where they affect Fed responsibilities. Both committees will also work with the Fed’s community development, payments, international coordination, and economic research and data areas, she indicated.

She also said the Fed is investing in new research, data, and modeling tools to support the work of the committees. “In light of the high uncertainty inherent in estimating climate-related shocks, scenario analysis may be a helpful tool to assess the effects on the financial system under a wide range of assumptions,” Brainard said. “Climate scenario analysis identifies climate-related physical and transition risk factors facing financial firms, formulates appropriate stresses of those risk factors under different scenarios, and measures their effects on financial intermediaries and the financial system.”

FRB Gov. Lael Brainard: “Financial Stability Implications of Climate Change”