Speaking at an industry event today, Federal Reserve Governor Lael Brainard expressed support for mandatory climate disclosures to help measure and mitigate climate risk. “Current voluntary disclosure practices are an important first step, but they are prone to variable quality, incompleteness, and a lack of actionable data,” Brainard said. “Ultimately, moving toward standardized, reliable, and mandatory disclosures could provide better access to the data required to appropriately manage risks.”
As bank supervisors weigh various approaches to assessing climate risk, Brainard noted that scenario analysis that takes into account physical and transition risks and their potential effects on individual firms and the financial system as a whole “may be a helpful tool to assess the microprudential and macroprudential implications of climate-related risks under a wide range of assumptions.”
She clarified, however, that “scenario analysis is distinct from our traditional regulatory stress tests at banks,” and that “it will be important to think carefully about the potential for scenario analysis to support microprudential and macroprudential objectives and to consider how stress testing and scenario analysis may complement one another.”
Brainard also acknowledged that mandatory climate stress tests or a highly prescriptive approach to model development and scenario analysis may not be the most effective strategy. Rather, she noted that “we should strive for an appropriate balance that allows for innovation and learning across the public and private sectors, iterating in the most effective way possible.”