The Fed Takes a Measured Stance on Climate

The Fed Takes a Measured Stance on Climate

Testifying at a hearing in front of the Senate Banking Committee this week, Federal Reserve Chairman Jerome Powell took what some consider to be a middle ground stance on climate change, stating, "Our role on climate change is a limited one, but it’s an important one. And it is to ensure that the banking institutions we regulate understand their risks and can manage them."

His statement was delivered amid mounting partisan pressure -- as Democrats push for the central bank to take action on climate, while many Republicans argue that climate change is a political issue and the Fed must prioritize financial stability.

Powell did confirm that, under his leadership, the Fed will require big banks to examine "climate stress scenarios" in order to assess future risks to their often fossil fuel dependent business models imposed by climate change.

Why This Matters

Increasingly, institutional investors face pressure to move away from fossil fuels, acknowledging that the promises made by oil and gas companies are not enough. If Powell were to demand greater disclosure of climate risks, the central bank could play a critical role in steering this capital away from fossil fuels and into renewables.

What's Next?

Indeed, legislation has already been proposed to establish the role of the Fed on climate change. The Fossil Free Finance Act, for instance, introduced by a group of progressive Democrats including Senator Ed Markey (D-MA) and Representative Mondaire Jones (D-NY), would require the central bank to place limits on fossil fuel investment.

So far, Powell has not discussed specific policy actions he's considering. Instead, he has stated that the "broader answer to climate change has to come from legislators and the private sector." A sign that climate ambition is growing as a priority at the Fed was the nomination of climate advocate Sarah Bloom Raskin. Still, in order to ensure effective change and avoid future losses associated with climate risk, US financial regulators need to act soon.

CNBC: Fed Chairman Jerome Powell testifies before Congress during confirmation hearing, January 11, 2022.