WASHINGTON –The Federal Reserve and its 12 regional district banks—chartered to oversee private banks and promote economic stability in the U.S.—must consider climate risks to safeguard the financial system and economy from the rising economic impact of climate change and the shift to a clean energy economy, a new report by NRDC (Natural Resources Defense Council) urges.
How Regional Federal Reserve Banks Can Contend with Economic Risk from Climate Change, notes that, with rising risk to our financial system, the Federal Reserve should address climate change–related financial and economic risk.
“As the nation’s economic guardian, the Federal Reserve has an obligation to assess risks to the economy, to protect consumers and to promote financial stability—but it’s not doing enough today to factor in the growing risks from climate change,” Sarah Dougherty, the author of the report, head of the Green Finance Center at NRDC, and who worked at the Federal Reserve. “To meet its mission, the Federal Reserve system must move to account for those rising risks and costs across its areas of responsibility.”
By considering the risks—to the economy and to financial institutions—posed by more extreme weather events and a transition to a low-carbon economy, the Fed can potentially avert or cushion shocks to impacted industries, geographical areas, and crosscutting supply chains and to affected lenders, investors and consumers, according to the report.
Leading scientists warn that climate impacts are accelerating—in worsening hurricanes, drought and wildfires—which will increasing harm the U.S. economy. As part of the Fed’s duty to safeguard the nation’s banking and financial system it has a large role in protecting banks and our financial system from the economic harms from climate change.
“Working with the nation’s banks, businesses, and community leaders, the Fed must use every tool in the kit to shield families, communities and the overall financial system from economic upheaval fueled by climate change,” said Dougherty.
The report highlights four of the 12 districts, which are feeling the impacts of climate change—in stronger hurricanes, rainfall extremes affecting agriculture, record-breaking wildfires in the West, and the shift away from fossil fuel generation to clean energy. While the impacts are already costly, they have not been addressed in the Beige Book, the Fed’s regular reports on economic activity which help develop a national picture of the economy when published eight times annually.
Nor has the Federal Reserve system broadly incorporated climate hazard into its work to analyze emerging issues and minimize systemic risks to the economy and financial institutions.
Unless the full range of climate risks are accounted for—in the portfolios of individual banks, in the potential impact on the overall U.S. financial system, and in the Fed’s work to maintain stable prices and maximize employment—the U.S. economy may experience severe financial shocks and losses from climate change, and people may suffer economic hardship. Vulnerable groups, especially low- to moderate-income communities and communities of color, are particularly at risk, the report concludes.
The report has four specific recommendations:
Perform research, data collection, and public outreach at the District Bank level on climate economic risk. The District Banks should collect data and conduct research on the economic effects of climate change, focusing on conditions within their districts, including broken down by community, income, and race to ensure that the economy works for all people.
Spotlight the economic effects of climate change in Beige Books. The District Banks should augment their Beige Book information collection by asking their sources specifically about the climate change–related economic effects of events such as hurricanes, drought, and wildfires and about adaptation measures responders are implementing.
More thoroughly consider climate change risk in price stability research. The District Banks should deepen their research into price expectations in the context of climate change and enhance their climate change–related data collection (including for the Beige Book) and their pricing and inflation modeling.
Address the disproportionate impact of climate change on low-income communities and communities of color. The District Banks should collect the data and conduct the qualitative research—broken down by community, income, and race—necessary to provide guidance to policymakers and enable the Fed to carry out this aspect of its mandates.
The full report can be found at: https://www.nrdc.org/resources/how-regional-federal-reserve-banks-can-contend-economic-risk-climate-change
A blog by Sarah Dougherty and colleagues on the issue is here: https://www.nrdc.org/experts/sarah-dougherty/what-fed-district-reserve-banks-should-do-about-climate-0
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NRDC (Natural Resources Defense Council) is an international nonprofit environmental organization with more than 3 million members and online activists. Since 1970, our lawyers, scientists, and other environmental specialists have worked to protect the world's natural resources, public health, and the environment. NRDC has offices in New York City, Washington, D.C., Los Angeles, San Francisco, Chicago, Bozeman, MT, and Beijing. Visit us at www.nrdc.org and follow us on Twitter @NRDC.