Climate change may present risks to financial system

Following the U.S. Federal Reserve’s January meeting, Fed Chair Jerome Powell indicated the central bank would consider joining other central banks’ efforts at combatting climate change… eventually.

The Network for Greening the Financial System (NGFS) is a coalition of 54 of the world’s major central banks, formed in December 2017, with the purpose of helping to strengthen the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development. To date, the Fed has not joined.

Asked about the Fed’s reluctance to join, Powell responded, ““We’ve been looking at joining in one form or another … we probably will do that at some point.” While the Fed has yet to join, it has attended all of the NGFS’s meetings, Powell noted.

Asked whether he believed climate change posed a system-wide financial stability risk, Powell responded, “It’s certainly possible, and that feeds into the way that we’re thinking about climate change as an institution.”

Climate fight should be up to elected officials…

Powell cautioned, however, that the central bank’s role must be limited, leaving the nation’s response up to elected representatives, saying, “Society’s overall response to climate change needs to be decided by elected officials, and not by the Fed.”

…But central banks have a role to play

That said, Powell acknowledged that the Fed did have a responsibility to ensure the stability of the financial system, which could lead to some role in the climate change fight. “The public has every right to expect and will expect that we will ensure that the financial system is resilient and robust against the risks of climate change,” said Powell.