The Federal Reserve on Friday proposed new guidance for the country’s biggest banks in managing climate-related financial risks, a step proponents say is needed to prepare for climate change but that opponents say constitutes unwarranted regulatory micromanaging.
The Fed announced that it is soliciting public comment on the proposal for the next 60 days for what it characterizes as a “high-level framework” for financial institutions with more than $100 billion in total assets to manage financial risk associated with climate change.
The framework would address both physical risks associated with the changing climate, in addition to transitional risks, which come as companies move away from fossil fuels. The guidelines would cover governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis, according to the Fed.
“Weaknesses in how banking organizations identify, measure, monitor, and control climate-related financial risks could adversely affect a banking organization’s safety and soundness,” Fed staff said in a memo.
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“Many large banking organizations are considering these risks, and guidance in this area could promote a consistent understanding of how large banks can effectively manage climate-related financial risks as they develop capabilities and deploy resources to manage such risks,” the memo read.
Allowing the framework to go to the public comment phase passed with a 6-1 vote by the Fed Board of Governors. Christopher Waller, a Republican, was the only member to dissent.
“Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States,” Waller said in a statement. “The Federal Reserve conducts regular stress tests on large banks that impose extremely severe macroeconomic shocks and they show that the banks are resilient.”
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Miki Bowman, also a Republican, said that while she voted to solicit public opinion, it doesn’t mean she will vote for finalizing the guidance. She also emphasized that it only applies to the biggest banks and said it is critical that any final guidance “complement the existing supervisory framework supporting the safety and soundness of financial institutions.”
The Biden administration has tried to overhaul financial regulations to account for climate change, including in ways that could pressure the private sector to move away from fossil fuels. Most notably, the Securities and Exchange Commission has proposed a rule that would require that large corporations disclose climate-related risks.
Republicans have said the Fed doesn’t have the authority to engage in climate-related supervision or regulation, and that such measures would hurt energy production.
