Fed to Join Central Banks’ Climate Coalition

The Federal Reserve Bank of the United States has asked to join the Network for Greening the Financial Sector (NGFS)—a coalition of 75 central banks working to understand climate risks and adjust, projections, regulations and investments, to be climate-smart.

As Bloomberg reports:

The NGFS requires its members be signed up to the Paris Climate Accord. President Donald Trump announced in 2017 that he was withdrawing the U.S. from the pact, but President-elect Joe Biden has pledged to rejoin as he makes fighting climate change a key focus for his administration when he takes office in January.

The move is a powerful signal that the US central bank is ready to move forward with the transition to a Biden presidency, which will start at 12:00 noon on January 20, 2021. Fed Chair Jerome Powell had signaled in January that this was likely to happen. The request comes two days after the Fed for the first time formally recognized, in its semi-annual Financial Stability Report (PDF), for the first time formally recognized climate change as a threat to fiscal and economic stability.

Fed Governor Lael Brainard explains:

Increased transparency through improved measurement and more standardized disclosures will be crucial. 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.

The report cites specific climate-related risks to finance, real estate, banking, lending, and securities, as well as non-financial areas of risk. The November 2020 Financial Stability Report also makes clear:

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 mar- kets 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.

The Federal Reserve’s new direction on climate risk and resilience comes two months after the Commodity Futures Trading Commission (CFTC) released a special report identifying climate change as a threat to the stability of the entire financial system and the wider US economy.

The recognition of climate change as material financial risk and the request to join the central banks’ climate coalition come as the City of London, the UK’s Green Finance Institute, and the World Economic Forum co-host the Green Horizon Summit—exploring the realignment of all finance toward “a sustainable and resilient future for all”. The Summit examines new directions for finance in 5 areas, on the way to a major upgrade of national climate action commitments in 2021, ahead of the COP26 UN Climate Change negotiations:

• Reporting, Risk Management and Return
• Financing the Energy Transition
• Infrastructure and Green Growth
• Financing Resilience and Adaptation
• Nature and Net Zero

On Monday, the UK—which will host the COP26—announced its first ever sovereign green bond, to be issued next year as part of a wider effort to shift the financial sector toward a future of net-zero carbon emissions. The UK’s Chancellor of the Exchequer Rishi Sunak said:

This will be the first in a series of new issuances as we look to build out the green curve over the coming years, helping to fund projects to tackle climate change, finance much-needed infrastructure investment and create green jobs across this country.

The momentum is shifting away from business as usual and toward the realignment of mainstream finance—in the public, private, and multilateral sectors—with long-term climate resilience. With the incoming Biden administration planning to not only reinstate the US as a signatory to the Paris Agreement but to drive the nation toward net-zero carbon emissions no later than 2050, there is now talk of a Big Four climate leaders club:

• The European Union — Net-zero by 2050 (supported by a European Green Deal)
• The United States — Net-zero by 2050 (with the power sector carbon pollution free by 2035)
• Japan — Net-zero by 2050
• China — Net-zero by 2060

These major commitments would mean nations whose economies account for roughly 64% of global GDP and 50% of global greenhouse gas emissions would be formally on track to realign policy, investment, infrastructure and innovation to phase out carbon emissions by mid-century.

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The featured image at the top of this article is taken from the 2018 4th National Climate Assessment, which covered Impacts, Risks, and Adaptation in the United States.