By Rachel Koning BealsGreg Robb
It didn’t take long for the Federal Reserve’s increased attention to climate change to spark pushback from Capitol Hill.
A group of nearly 50 Republican lawmakers wrote to the central bank’s leadership in early December arguing the Fed should back away from a proposal to hold banks responsible for accurately calculating climate-change risks via stress test.
The group of lawmakers also expressed reservations about Fed inclusion in an international network of central banks and regulators dedicated to fighting climate change through the global financial system.
“Current supervisory stress tests rely on large amounts of data related to credit losses across varying market conditions,” wrote the lawmakers, including Rep. Andy Barr, Republican of Kentucky. “The same quantity and granularity of data does not exist for climate-related financial stresses, and the available data may have gaps or a disqualifying level of subjectivity.”
Banks are already taking some steps to address climate-change risk, although most climate stewardship groups and, increasingly, investor groups, want them to do more and at a faster clip.
For instance, sustainability-minded investor groups urge a faster split from fossil-fuel financing and other business dealings they argue will aggravate global warming and bring added risk to the banks and their capital investments, as well as stock portfolios. The New York state pension fund this week announced its departure from fossil-fuel investments .
Bigger picture, financial interests are starting to factor in coastal erosion, drought and other extreme weather, as well as migratory plights that could launch a financial-system hit worse than that brought by the COVID-19 pandemic. Consumers are also warming to renewable energy and electric vehicles, which may demand shifting capital priorities.
The Fed and other U.S. regulators are also taking a closer look at unifying regulatory language around climate change and the financial system.
Still, banking-industry and conservative trade groups, and now these lawmakers, say the stress test is not a good fit in a portfolio of climate-change tools, a view that marks a split from regulatory action in Europe and elsewhere
“Some regulators have suggested going further in an attempt to quantify those risks for capital purposes using government-run climate stress testing,” Greg Baer, president and CEO at the Bank Policy Institute, wrote in a recent op-ed for American Banker .
“Such testing comes with assumptions about how the climate will evolve, how governmental policy will change and how both will affect bank borrowers. Those are very difficult projections to make, and can become highly speculative over the longer term,” Baer said.
Phil Rossetti, senior fellow on energy and climate change at the right-leaning R Street said “a stress test is really a tool for identifying near-term financial risks, so I think the concern about its suitability in evaluating the risk of a long-term problem like climate change is certainly fair.”
“That said, we do know that climate change presents at least some level of financial risk, and a first step should be identifying to what extent existing disclosure requirements and regulations do or don’t mitigate those risks,” he said.
The Fed has increasingly brought climate-change risks into its discussions and actions, although at a rate that still lags behind other major central banks.
Fed Chairman Jerome Powell last month said the U.S. central bank had been working with the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), a global body from which the Fed is rare holdout among industrialized peers. Fed Governor Randal Quarles told lawmakers at a hearing, “We have requested [NGFS] membership. I expect that it will be granted.”
The Fed board approved the decision to join the NGFS by a 6-0 vote on Dec. 7 and announced the affiliation Dec. 15.