Uncertainty about the impact climate change may have on the financial system should not prevent financial firms and their supervisors from moving now to prepare for the shocks to come, a key Federal Reserve policymaker said on Thursday.
Fed Governor Lael Brainard, in remarks to an Institute of International Finance forum on the move to a low-carbon economy, said financial firms faced risks not just from weather-related disasters, but also potentially fast changes in asset prices if and when government policies change.
“While the scientific evidence for climate change is unequivocal, estimates of the magnitude of climate-related financial risks are highly uncertain,” said Brainard, who is spearheading the Fed’s efforts to determine how the central bank should incorporate climate considerations into its operations and oversight of the financial system.
“This residual uncertainty should not stand in the way of making prudent investments in risk-management practices in the near term,” Brainard said.
Central banks globally are trying to determine how climate change should fit into their work. The economic impacts of severe weather, for example, were hammered home even as Brainard spoke, with a freak winter storm pummeling the energy grid in Texas.
While the impact of that sort of “physical risk” is notoriously hard to predict and may evolve over a longer time horizon, the ongoing policy debate about how to arrest the global rise in temperature could bring about its own sort of stress, she said.
“Unanticipated or abrupt shifts in policy, technology, or investor sentiment have the potential to produce abrupt repricing events that could result in losses on financial institution balance sheets,” Brainard said.
Different options are being studied for possible use in supervision, Brainard said, including the development of a type of scenario analysis that assesses how financial institutions cope with long-term climate challenges.
“Standardized, reliable and mandatory disclosures could provide better access to the data required to appropriately manage risk,” she said.