Federal Reserve Board ("FRB") Governor Lael Brainard outlined the FRB's efforts towards addressing the microprudential and macroprudential implications of climate change. In a speech at the "Transform Tomorrow Today" Ceres 2021 Conference, Ms. Brainard said that a tailored framework would enable the financial system to be resilient to risks associated with climate change.
Ms. Brainard warned that "Financial market participants that do not put in place frameworks to assess and address climate-related risks could face significant losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition, or both." She advocated for "robust risk management; scenario analysis; consistent, comparable disclosures; and forward plans can help ensure the financial system is resilient to climate-related risks and well positioned to support the transition to a sustainable economy."
Ms. Brainard referred to the recent establishment of two committees, one dedicated to microprudential considerations and the other to macroprudential, to address the wide range of implications of climate change. The first committee, the Supervision Climate Committee (or "SCC"), intends to improve the Federal Reserve's capacity to evaluate climate-related financial risks on a microprudential level and create adequate programs to oversee supervised firms. The second committee, the Financial Stability Climate Committee (or "FSCC"), intends to consider climate-related risks on a macroprudential level in the context of "complex interactions across the financial system."
Ms. Brainard noted the FRB's 2020 (i) Supervision and Regulation Report (see prior coverage), which described the impact of climate change on the financial system through traditional channels, such as the credit, market, operational, legal and reputational risks of firms, and (ii) Financial Stability Report, which described the increased financial shocks that may result from climate change and how vulnerabilities in the financial system could worsen such shocks. Ms. Brainard cautioned that climate-related risks can modify the statistical time-series properties of economic variables, which would complicate forecasting done on a historical basis. Additionally, Ms. Brainard stated, there remains great uncertainty regarding policies and behavioral and technological changes that are likely to take place as the economy transitions toward becoming more sustainable.
Ms. Brainard stated that the Federal Reserve is investing in modeling tools, research and data. She also emphasized that international collaboration on climate-related risks is crucial because climate change is a challenge that is inherently "cross-border and cross-sectoral."
Commentary
How will this approach translate into actual lending policies? Will the banking regulators discourage concentrated lending to coastal states, such as New York and California, on the theory that these geographies are subject to increased climate risk?
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