The Federal Reserve’s November 2020 “Financial Stability Report,” which usually examines how economic and market forces could impact banks, insurance companies, and other firms, has addressed the implications of climate change for financial stability for the very first time.
The Fed and climate change
The US central banking system, known as The Fed, doesn’t yet get specific from a regulatory standpoint, but the fact that it’s acknowledging the real economic impact of climate change is significant. The two-page climate change section (pages 58-59) in the report, which is included in the larger section, “Near-Term Risks to the Financial System,” and is styled in a sidebar-style box, contains the excerpt:
Climate change adds a layer of economic uncertainty and risk that we have only begun to incorporate into our analysis of financial stability.
The Federal Reserve is evaluating and investing in ways to deepen its understanding of the full scope
of implications of climate change for markets, financial exposures, and interconnections between markets and financial institutions. It will monitor and assess the financial system for vulnerabilities related to climate change through its financial stability framework. Moreover, Federal Reserve supervisors expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.
According to CNBC, Fed governor Lael Brainard first brought up the need to address climate change a year ago:
It is vitally important to move from the recognition that climate change poses significant financial stability risks to the stage where the quantitative implications of those risks are appropriately assessed and addressed.
I live in St Petersburg, Florida, and as I write, I am receiving distraught texts from friends whose houses and cars are flooded in the aftermath of Tropical Storm Eta, which surprised us all, including the National Hurricane Center, by rapidly shifting east yesterday after devastating Central America as a Category 4 hurricane and then drunkenly meandering around in the Gulf of Mexico for days.
I live in a non-flood, non-evacuation zone, because we took climate change into account when we moved here. We have not suffered water damage, and we got lucky and have no wind damage. And I’ll be transparent here, as I have been all along: I voted for the presidential candidate who has a climate-change plan. Although my own county also did so, sadly, the majority of Florida’s voters did not.
So this section of the Fed’s report is personal:
Some residential and commercial properties will be subject to acute hazards such as storm
surges associated with rising sea levels and more intense and frequent hurricanes. Continued productive use of these properties would require investment and adaptation. As inundations or storm surges
become more frequent, the expected value of exposed real estate may decrease, which may in turn
pose risks to real estate loans, mortgage-backed securities, the holders of these loans and securities,
and the profitability of nonfinancial firms using such properties.
Climate-change denial is very bad business, and it is exorbitantly expensive. Green energy is smart business. (And let’s not even talk about insurance right now — that’s a disaster waiting to happen.) Banks are beginning to address climate change, and the Fed is right to address them in this latest report.
Good to see the Fed waking up, but they’d be wise to hustle with a solid plan. Maybe there’s a chance that could happen during the Biden administration.
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