Addressing Climate-Related Financial Risk Through Bank Capital Requirements Getty/Drew Angerer
People walk past the New York Stock Exchange on a rainy day in the Financial District, October 2018, in New York City.
Julia Cusick
Introduction and summary
The climate crisis has profound implications for every sector of the economy, every corner of society, and every aspect of public policy. Several years ago, it may have been acceptable for U.S. financial regulators to brush climate change aside as an issue left to other government departments and agencies. Today, improved data and climate-risk economic analysis, coupled with strong international consensus, make it untenable for financial regulators to ignore the critical nexus of climate change and the financial system. Even some of the conservative regulators appointed by President Donald Trump now view climate change as an important priority that falls within their remit.
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Tomorrow, Treasury Secretary Janet Yellen will lead a meeting of the Financial Stability
Oversight Council (FSOC). The preliminary agenda for the open
session includes climate change and its potential impacts on
financial stability.
Appearing before Congress last week, Secretary Yellen stressed
the importance of FSOC and its unique role in coordinating
responses to issues like climate change. She specifically noted
that climate change is a top priority of the Biden
[a]dministration and FSOC can play a role in arranging
discussions among financial regulators all of whom have
US Financial Regulators Moving ‘Very Fast’ to Take on Climate Change
WASHINGTON Financial regulators around the world are rushing to implement models to measure the financial risk arising from climate change. Central banks including the Federal Reserve may soon begin to implement climate stress tests of banks, which may limit financing for industries such as mining, oil, and gas.
The world’s largest central banks are pondering how to promote green financing, as they seek to introduce regulatory frameworks to “mobilize” more money for green and low-carbon investments.
Critics, however, argue that the proposals to introduce climate stress tests aim to “defund the fossil fuel industry” and steer funds to “fashionable but unprofitable investments.”
How central banks are tackling climate change risks
(Credit: Unsplash)
This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.
Author: Silvia Anna Ainio, Policy Officer, European Commission
Central banks have an increasingly critical role in tackling climate change policy objectives.
Incorporating climate-related risks into regulatory frameworks remains challenging but central banks are starting to lead the way.
The case for incorporating climate change into macroeconomic modeling and investment decisions has never been stronger. Extreme weather events such as floods and storms have now become more frequent, and their impact on growth and inflation is increasingly visible and felt around the world. Recent research has shown how climate change can have a strong impact on the stability of the global banking system by increasing the frequency of banking crises in the medium to long-term.
Ben Cahill
Energy Security and Climate Change Program
The Biden administration, mindful that its climate policies could hasten the already steep decline of the coal industry, aims to revitalize coal-dependent communities. President Biden’s climate-focused executive order signed on January 27 established an interagency working group to support vulnerable communities.
The group’s first report highlights 25 energy communities that are potentially at risk and identifies $38 billion in available federal funding to invest in infrastructure, broadband, small businesses, and local financial institutions. Environmental remediation will be a priority, building on President Biden’s plan to invest up to $16 billion in plugging orphaned oil and gas wells and reclaiming abandoned mines. The Biden administration plans to hold a series of town hall discussions in these communities, in an important step toward engaging local voices to find solutions rooted in each region’s particular needs