Jan 12, 2022 - Economy

Powell likely won't do what green activists want most

Illustration of Jerome Powell

Illustration: Sarah Grillo/Axios

Federal Reserve chairman Jerome Powell is offering Democrats fresh pledges to make climate change a priority, but there's little sign he believes the central bank should act to thwart Wall Street finance for polluting industries.

Driving the news: Powell told the Senate Banking Committee Tuesday that the Fed would proceed with analyzing banks' readiness to grapple with global warming and the ways climate change can threaten financial stability.

  • "Our role on climate changes is a limited one, but it's an important one. And it is to ensure that the banking institutions that we regulate understand their risks and can manage them," said Powell.

Yes, but: There's no sign that Powell, who President Biden has nominated for a second term, sees a direct role for the central bank in steering capital away from oil, gas and coal.

  • Some green groups want specific interventions to create more hurdles for fossil finance. The Sierra Club and Evergreen Action want "portfolio limits" on the level of polluting assets banks can hold. They also say the Fed should increase the capital banks must hold for their fossil portfolios.
  • Powell wasn't asked directly about these ideas yesterday. But in an exchange with Sen. Kevin Cramer (R-N.D.), Powell said, "The broader answer to climate change has to come from legislators and in the private sector."

What's next: Powell confirmed the Fed plans to subject big banks to "climate stress scenarios," which Powell said will be "a key tool going forward."

  • "Climate stress scenarios at this stage are really about ensuring that the large financial institutions understand all of the risks that they're taking," Powell said.
  • He said this includes "risks that may be inherent in their business model regarding climate change over time."
  • That's a reference to so-called transition risk, such as emissions policies that jeopardize fossil fuel projects and companies.

The big picture: Powell, who is likely to be confirmed, has been increasing the Fed's focus on analyzing climate-related financial risks. But he faces dueling political pressures. Republicans see mission creep at the central bank, while the left wants more aggressive steps.

  • For instance, Democrats Sen. Ed Markey and Rep. Mondaire Jones — backed by several green groups — have introduced legislation that would require the Fed to mandate new restrictions on fossil finance.

What we're watching: More policy hints could arrive tomorrow when Lael Brainard — a Fed board member that Biden has nominated for vice chair — appears before the banking panel that vets Fed nominees.

  • Brainard has been outspoken on climate. And so has Sarah Bloom Raskin, who Biden may nominate to be the Fed's powerful vice chair of supervision.
  • Raskin, currently a law professor at Duke University, wrote recently that financial regulators "need to ask themselves how their existing instruments can be used" to spur the rapid transition from high-emissions investments.

Go deeper: Bank regulators push Wall Street on climate risk

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