WASHINGTON–Two new committees will focus on the impact of climate change on financial stability, according to a Federal Reserve Board governor.
Speaking to the Ceres 2021 Conference in Boston via a webcast, Federal Gov. Lael Brainard said the agency is finding it “increasingly clear” that climate change could have “important implications” for the future.
Brainard said the new Supervision Climate Committee (SCC) will address the “microprudential” side by strengthening the agency’s ability to consider climate change risk and develop an “appropriate program to ensure the resilience of our supervised firms” to the risks posed.
According to Brainard, the second committee – the Financial Stability Climate Committee (FSCC) – will identify, assess, and address climate-related risks to financial stability through a “macroprudential approach” that considers the potential for “complex interactions across the financial system.”
She said both committees address “two pillars” of the agency’s framework for addressing the economic and financial consequences of climate change.
Aligning Objectives
“Microprudential and macroprudential objectives are often aligned,” said Brainard. “For example, consistent disclosures are important not only to enable individual financial firms to measure and manage their exposure to climate-related financial risks, but also to support financial stability more broadly by helping the market to accurately price that risk. Given the importance of consistent, comparable, and reliable disclosures to financial stability and prudential objectives, mandatory disclosures are ultimately likely to be important.”
According to Brainard, both goals may not fully align in all circumstances, so it’s important to consider the implications both for individual firms’ safety and soundness and also for the broader financial system.
“For example, the use of climate-related risk mitigants such as insurance or financial derivatives may shift risk away from a particular financial institution but may not reduce or eliminate risk from the system as a whole,” explained Brainard. “In developing a framework to address climate-related financial risks, we need to be mindful of this cascade of effects and the implications across the Federal Reserve’s range of responsibilities.”
The Broad Goals
In addition, Brainard said the new FSCC is a “systemwide committee” charged with developing and implementing a program to assess and address climate-related risks to financial stability. The broad goals are to promote the resilience of the financial system to climate-related financial risks, ensure coordination with the Financial Stability Oversight Council (FSOC), and increase the Fed’s international engagement and influence on this issue, she said.