Federal Reserve Tells U.S. Banks To Assess Climate-Related Risks

By Irina Slav - Jan 19, 2023, 

The Federal Reserve has tasked the largest U.S. lenders to make an assessment of the risks they are vulnerable to in case of an extreme weather event caused by climate change.

The U.S. central bank recently released information about a “pilot climate scenario analysis” that aims to find out what disruptions climate change and the energy transition itself could cause the business world, E&E News reports.

As well as extreme weather events such as hurricanes, floods, and wildfires, scenarios that could affect top lenders’ performance also include protests against high-emission but highly profitable businesses in which banks have invested.

The purpose of the exercise, as the Fed calls it, is dual: first, to gauge the banks’ ability to tackle literal, physical damage from, say a hurricane, on its real estate portfolio, and, second, to assess their ability to deal with the financial fallout of such an event that causes financial stress for their customers, compromising their ability to repay their loans.

The lenders that need to submit an assessment of their climate change and transition risks include JP Morgan, Goldman Sachs, Morgan Stanley, Citi, Wells Fargo, and Bank of America. They have until the end of July to complete their assessments and develop a transition scenario for their operations.

Consumer rights advocacy Public Citizen has been quick to criticize the Fed’s plan. According to the organization, as quoted by Politico, the tests are too narrow and use models that rely too much on carbon offsets, which will lead to an underestimation of the risks that need to be assessed.

However, these tests could be seen as the starting pistol for a wave of climate-related disclosures. Last year, the SEC announced it would introduce rules mandating emission disclosures from all listed companies. The Treasury Department, meanwhile, is preparing a similar stress test for insurers.

By Irina Slav for Oilprice.com