Feb 19, 2021 - Energy & Environment

The Federal Reserve's deepening look at climate

earth surrounded by cash
Illustration: Eniola Odetunde/Axios

A key member of the Federal Reserve's board said climate change is "already imposing substantial economic costs" as she laid out new information about the Fed's approach to the topic.

Why it matters: Lael Brainard's remarks signal the Fed's deepening involvement in the nexus between global warming and the financial system.

  • The comments also matter because she's seen as a frontrunner to be the Fed's next chair if President Biden replaces Jerome Powell, a Trump appointee, when his term expires early next year.

Driving the news: Lael Brainard, speaking to a climate conference Thursday, said a few things worth noting...

1) She moved toward backing compulsory disclosure of climate risks by financial institutions.

  • "Ultimately, moving toward standardized, reliable, and mandatory disclosures could provide better access to the data required to appropriately manage risks," Brainard said at the Institute of International Finance event.

2) Brainard said the Fed should subject financial institutions to "scenario analysis" to determine risks from physical effects of climate change and the transition to a low-carbon economy.

  • Of note: While environmentalists have called for "climate stress tests" of banks akin to tests of their ability to withstand economic shocks, Brainard didn't go that far.
  • She said it's not a "regulatory exercise" like stress tests but instead an "exploratory" effort to gauge "business model resilience to a range of long-run scenarios."
  • A number of Republicans have pushed back against the idea of climate stress tests.

3) Brainard also offered a little more info about the Fed's recently formed "Supervision Climate Committee."

  • She said it's already interacting with a "diverse group" of financial institutions and industry groups to see how thinking about climate risks and opportunities and preparing for a low-carbon economy.
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