The Federal Reserve's recent announcement that it would officially join an international network of central banks indicates the increasing focus on climate change risk on the part of financial regulators. The perspective increasingly adopted by these financial regulators is that climate change risk extends throughout the financial system--e.g., mortgages secured by collateral vulnerable to rising seas, commercial loans extended to industries engaged in carbon-intensive activities.
And, as regulators focus on climate change risk, the regulated industry must therefore also take climate risk into account when engaged in significant decision-making--or else face the prospect of increased regulatory scrutiny.
The Fed’s board in Washington voted unanimously to become a member of the Network of Central Banks and Supervisors for Greening the Financial System, it said in a statement on Tuesday. The central bank began participating in the group more than a year ago, but its formal membership is something that Democratic lawmakers have been pushing for and that Republicans have eyed warily.
The Fed’s halting approach to joining underlines how politically fraught climate-related issues remain in the United States.
The network exists to help central banks and other regulators exchange ideas, research and best practices as they figure out how to account for environment and climate risk in the financial sector. While the Fed had participated informally, its decision to join as a member is the latest sign of its recognition that the central bank must begin to take extreme weather events into account as they occur with increasing frequency and pose a growing risk to the financial system — whether doing so is politically palatable or not
Even so, the Fed has been more reticent than many of its peers when it comes to embracing a role in working to alleviate climate change and manage its fallout. The Bank of England has unveiled its plans to run banks through climate stress tests — which will test how their balance sheets will fare amid extreme weather events — though they have been postponed by the coronavirus pandemic. The president of the European Central Bank, Christine Lagarde, has indicated that her central bank is considering whether it should take climate into account when buying corporate debt.