Over the past few months, the Federal Reserve has joined an international group of central banks focused on climate risk, pointed to climate change as a threat to financial stability and established its own Supervision Climate Committee.
On Thursday, Republicans on the Senate Banking Committee told Fed Chair Jerome H. Powell in a letter that they were concerned the Fed might use its supervision of the banking system to “further environmental policy objectives,” which “would be beyond the scope of the Federal Reserve’s mission.”
Led by Sen. Patrick J. Toomey (R-Pa.), the lawmakers wrote that the Fed lacks “jurisdiction over and expertise in environmental matters,” questioning whether it had the authority to police climate risks.
In a statement, a Fed spokesperson said the central bank had received the letter and plans to respond. Powell, for his part, has said many financial institutions are already focusing on how climate change will affect their business models over time. The Fed’s attention to these issues is a natural outgrowth of the central bank’s job, he says.
“We’re looking at the same thing from the standpoint of a regulator and supervisor, so research and basic work to lay out a framework, which will take some time, but it is time for us to do that,” Powell told lawmakers in the House last month.
But beyond the Fed’s oversight of the banking system, climate issues have put the Fed up against political jockeying on Capitol Hill. During the Banking Committee’s first-ever hearing on climate risk on Thursday, Toomey said the Fed’s attention to climate issues ultimately betrayed Fed independence. (Powell did not testify at the hearing.)
“By straying from its core mission and authorities in support of vague and ill-defined climate goals, the Federal Reserve’s actions threaten to undermine its credibility,” Toomey said in opening remarks.
Democrats, meanwhile, have called on all financial regulators, including the Fed, to ramp up their oversight to include issues tied to climate change.
“We can’t always predict what it might be,” Sherrod Brown (D-Ohio), the committee chair, said at Thursday’s hearing. “In this case, though, we can predict something that’s going to hurt the economy. We know that climate change threatens the country’s financial stability.”
Powell has said the government’s response to climate change must come from elected officials in Congress and the White House. But the Fed’s role is to ensure the resilience of the financial system, including through the regulation of banks and other financial institutions.
“Climate change is an emerging risk to financial institutions, the financial system and the economy,” Powell told reporters in December. “And we are, as so many others are, in the very early stages of understanding what that means, what needs to be done about it and by whom.”
The Fed is not alone among financial regulators taking a more formal approach to climate change. Under the Biden administration, the Securities and Exchange Commission named a senior policy adviser oversee the agency’s work related to climate risk and other environmental issues. The Commodity Futures Trading Commission this week established a Climate Risk Unit to focus on the role of derivatives in understanding, pricing and addressing climate-related risk.
In a stark departure from the Trump era, the Biden White House has launched its climate agenda, with a focus on clean energy jobs and environmental justice, as one of its top priorities. That push, in turn, has trickled down to agencies like the SEC and CFTC, whose leadership changes under new administrations.
But those shifting winds also put Powell in a difficult spot. The Fed avoids politics at all costs, staking much of its authority on its independence from Capitol Hill and the White House.
“They try so hard to stay out of politics, but they always operate in a political context,” said Claudia Sahm, a former Fed economist and now a fellow at the Jain Family Institute, on the Fed’s attention to climate risk. “That’s just D.C.”
Politics may not influence the Fed’s decisions or policymaking, but it does shape how central bankers talk about their work in public, Sahm said.
Climate change is “a good study of how the Fed’s rhetoric changed from Trump to Biden,” Sahm said.
“This is not going to be an activist Fed. But they’re going to be more open about what they’re doing, because they’re not going to be tweeted at by the president,” Sahm said, referring to President Donald Trump’s habit of attacking Powell and airing his displeasure with Fed policies. “They don’t want to get in a fight with progressives either.”
Recently, the Fed has been more up front with its work on climate risk.
In November, the Fed added a section on the implications of climate change to its Financial Stability Report, noting that “climate change adds a layer of economic uncertainty and risk that we have only begun to incorporate into our analysis of financial stability.”
In a statement at the time, Federal Reserve governor Lael Brainard said markets struggle to analyze and price climate risk, exposing the need for more research and transparency across the financial system.
“It is vitally important to move from the recognition that climate change poses significant financial stability risks to the stage where the quantitative implications of those risks are appropriately assessed and addressed,” Brainard said.
In December, 47 GOP lawmakers cautioned the Fed against joining the Network for Greening the Financial System, an international group of central banks focused on managing climate risk, without making a public commitment to only implementing policies that best serve the United States’ financial system. The Fed had participated in NGFS discussions and activities for more than a year beforehand and was among the world’s only major central banks that was not an official member.
The Fed formally announced it had joined the group Dec. 15, despite GOP concerns.
In January, the Fed tapped a senior official to run a new team examining climate change and its financial risks. Kevin Stiroh, previously head of the New York Fed’s Supervision Group, will run the board’s committee.
Just last month, Brainard said it might be helpful to subject lenders to a form of “scenario analysis” that could help lenders and regulators judge if the industry is prepared for climate change. The Fed is “closely following the climate scenarios being developed by other central banks and supervisory authorities … so we can learn from their experiences,” Brainard said.
The banking industry may have yet to fully embrace any additional oversight.
In November, Greg Baer, president and chief executive of the Bank Policy Institute, wrote in an op-ed that it’s important for bankers and their regulators to measure and manage climate risk “in a way that provides an accurate picture of what is at stake.”
“But trying to capture climate change effects decades in advance — without considering the extraordinary adaptability of the financial system and economy — and incorporating those results into the regulatory capital framework is no easier than predicting how pandemics or machine learning will affect banks by 2050,” Baer wrote in the American Banker.