The Federal Reserve is working to develop a scenario analysis through which banks can model the potential risks associated with climate change and assess their ability to manage those risks, Federal Reserve Governor Lael Brainard said at an industry event today. Acknowledging the challenges of conducting such an analysis and noting “we should be humble about what the first generation of climate scenario analysis is likely to deliver,” Brainard nevertheless underscored the importance of taking this “rudimentary” first step.
“The future financial and economic consequences of climate change will depend on the severity of the physical effects and the nature and speed of the transition to a sustainable economy,” she said. “So it is important to model the transition risks arising from changes in policies, technology, and consumer and investor behavior and the physical risks of damages caused by an increase in the frequency and severity of climate-related events as well as chronic changes, such as rising temperatures and sea levels.”
Brainard added that she “anticipate[s]it will be helpful to provide supervisory guidance for large banking institutions in their efforts to appropriately measure, monitor, and manage material climate-related risks, following the lead of a number of other countries.”
In related news, the Treasury Department today released its Climate Action Plan, which, among other things, directs Treasury bureaus to integrate climate change adaptation planning and actions into their programs, policies and operations. Read Brainard’s remarks. View Treasury’s Climate Action Plan.