WASHINGTON–A member of the Federal Reserve Board is warning that climate change is already creating substantial economic costs and is projected to have a profound effect on the global economy.
Speaking to a conference on climate finance sponsored by the Institute of International Finance, Federal Reserve Gov. Lael Brainard said future financial and economic effects will depend on the frequency and severity of climate-related events and on the speed at which countries around the world transition to a greener economy.
“Climate change and the transition to a low-carbon economy create both risks and opportunities for the financial sector,” Brainard told the conference. “Financial institutions that do not put in place frameworks to measure, monitor, and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy, or by a combination of both.
“Conversely, robust risk management, scenario analysis, and forward planning can help ensure financial institutions are resilient to climate-related risks and well-positioned to support the transition to a more sustainable economy,” she continued.
According to Brainard, the Fed has already begun to see financial institutions respond to climate-related risks by encouraging borrowers to adapt to and manage the risks associated with a changing climate, responding to investors’ demands for climate-friendly portfolios, and by funding critical private-sector initiatives to move toward more climate-friendly business models.
‘Increasing Awareness’
“As noted by members of our Federal Advisory Council, there has been increasing awareness among financial institutions of the need to define and develop risk management frameworks that incorporate these climate-related financial risks into strategic decision making on multiple levels, including investment approaches and the long-term structuring of portfolios,” Brainard said.
According to Brainard, financial regulatory agencies have a responsibility to ensure that financial institutions are resilient to all material risks – including those related to climate change – both currently and into the future.
She pointed to a recent survey of central banks that found a large majority view it as appropriate “to act within their existing mandate to mitigate climate-related financial risks” that “could potentially impact the safety and soundness of individual financial institutions and could pose potential financial stability concerns for the financial system.”