Analysis: The Fed comes into the climate change fold, says it’s in discussions with NGFS

Major speech from Lael Brainard signals Federal Reserve pivot on climate change

Late last week Lael Brainard went further than any senior Fed official so far in discussing its role in countering climate change.

She revealed the Fed is in “climate-related discussions” with the Financial Stability Board (FSB), the G20 body that houses the Task Force on Climate-related Financial Disclosures (TCFD), and with “other standard-setting bodies”.

The US central bank would also “continue to support” the work of the TCFD “in order to improve standardization of financial disclosures related to climate change”, although few would have been aware that that Fed was already supporting the TCFD!

Brainard – who is on the Board of Governors of the Fed, where she chairs the Committee on Financial Stability – added that she has been following the Bank of England’s plans to assess climate risks to the financial system, including through its exploratory stress-test scenario work.

She went so far as to say the Fed is “discussions” about how it might participate in the Central Banks and Supervisors Network for Greening the Financial System (NGFS) “in order to learn from our international colleagues’ approaches to measuring and managing climate risks in the financial system”. The Fed has been notable for its absence in the NGFS and if the talks proceed it will be a major boost for the NGFS.

The comments came at “The Economics of Climate Change” event, a research conference sponsored by the Federal Reserve Bank of San Francisco. It was a “first” for the Federal Reserve system.

None of this comes in a vacuum. Brainard noted the decision by the Commodity Futures Trading Commission’s (CFTC) to establish a Climate-Related Market Risk Subcommittee while in March, 20 US senators including Diane Feinstein, Bernie Sanders, Elizabeth Warren, Kamala Harris and Corey Booker, wrote to the Fed asking for detailed information on the steps taken to identify and manage climate-related risks in the US financial system.

Just this week, Atlanta Fed Chair Raphael Bostic has mentioned how his district is on the front lines of climate change, according to the Wall Street Journal.San Francisco Fed Governor Mary Daly said the rationale for the event was “pretty clear: climate change is an economic issue we can’t afford to ignore”.

As NGFS head, the Dutch Central Bank’s Frank Elderson said in his dinner address to the conference: “It’s about money. It’s about financial risks. Financial risks for the inhabitants of your beautiful state, financial risks for the insurers, financial risks for small businesses and the banks who lend to them, financial risks for local authorities.”

He wasn’t the only speaker to refer to assets potentially “suffering a sudden loss in value”.

The conference came in the week the Trump Administration confirmed it was pulling out of the Paris climate accord, a stark demonstration that while climate is now a top issue for US financial policymakers, it is not so for its political leadership.

Brainard’s speech came on the heels of New York Fed Executive Vice President Kevin Stroh speaking of a “new lexicon” emerging about climate risks, saying climate change is “complex—the impacts are uncertain, non-linear and hard-to-predict”.

“Trusted credit models” may prove less useful if weather-related shocks become a poor guide to the distribution of future losses.

“Asset prices may move sharply, and unpredictably, as consensus views change and future impacts are priced today.”

He also identified “significant data gaps”.

“Climate change is a global phenomenon, but risks should be assessed locally, which requires new data such as asset-specific, geo-spatial data.

“Borrower-specific analysis requires data, for example, on asset utilization and climate effects for particular industries at particular locations.

“Such granular data is currently limited and requires significant resources to acquire and process, but greater transparency about the physical location of assets will allow institutions to better assess exposures to at-risk borrowers or to specific geographic risks.”

RI ran a two-part feature on the Fed and climate change back in September