New Fed Chair Can and Must Do More on Climate

The new Chair of the Federal Reserve must protect our economy from major climate risks

By David Arkush

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The latest Intergovernmental Panel on Climate Change (IPCC) report provides a grim diagnosis of current and future climate harms, and it emphasizes the need for swift action over the next decade.

One regulator has a surprisingly big role in responding to the crisis: the Federal Reserve, or Fed. The Fed is tasked with safeguarding the health of the economy—keeping unemployment low and guarding against inflation. It’s also charged with protecting consumers and promoting economic development, particularly for communities of color, and with regulating finance to keep banks and the financial system stable. All of these missions are deeply entangled with the climate crisis.

Under current Chair Jerome Powell, the Fed’s performance on climate has been a near-complete failure. The Fed hasn’t just done nothing on climate—it has exacerbated the problem. When the COVID-19 pandemic threatened the financial system in March 2020, the Fed disproportionately bailed out fossil fuel companies.

Sign our petition telling Biden to nominate a Fed Chair who will take action on climate-related risks.

How is climate relevant to the Fed’s missions?

Rising temperatures threaten the economy. Climate-fueled disasters are increasingly killing people and causing unprecedented damage. Climate chaos is straining our ability to maintain basic infrastructure, decreasing access to water, and putting upward pressure on food prices. All of these problems (and more) threaten the Fed’s primary economic mission: maintaining stable prices and maximizing employment.

Low-income and BIPOC (Black, Indigenous and people of color) communities are hit first and worst by climate harms—and related financial harms. On top of being disproportionately vulnerable to climate harms due to decades of environmental racism, BIPOC communities are at risk of losing access to credit and insurance as financial institutions raise prices and pull out of the communities threatened by climate chaos. In other words, historic environmental racism and discrimination in housing and finance could lead to new injustices as finance “adapts” to climate chaos by raising prices and dumping customers, starting with those most vulnerable to climate harms. These dynamics are highly relevant to the Fed’s responsibilities to protect access to financial services and promote economic development in frontline communities.

Climate harms will increasingly strain financial institutions and the financial system, with the potential to cause sudden shocks that cause financial instability. To provide just one example, some economists believe there is a massive real estate bubble due to markets failing to incorporate climate threats into the price of homes (particularly sea-level rise). If the real estate market suddenly corrects, we could face a housing-driven financial crisis worse than that of 2007-2008. There are many other ways in which these types of “physical” climate risks threaten individual banks and the financial system—many in the very near term, and more over time as the climate crisis worsens.

But there’s another concern for the Fed’s financial regulatory mission:

Climate solutions pose threats to a financial system that is investing in the wrong things. To keep the planet safe for ourselves, much less our economy and financial system, we need to rapidly slash fossil fuel consumption. As we make progress on climate targets, assets related to fossil fuels will lose value, possibly very rapidly. If banks or other large financial institutions are too entangled with fossil fuels when that happens, we could face a financial crisis. The Fed, along with other financial regulators, must prepare the financial system for this possibility.

Rather than mitigate climate-related financial threats, banks are exacerbating them. At present, Wall Street is still aggressively financing fossil fuels, including new fossil fuel infrastructure and the dirtiest projects, like coal and tar sands, which will be abandoned long before the loans are paid off in any scenario where we keep the planet safe for ourselves. In fact, since the Paris Agreement, the largest banks have financed $3.8 trillion in fossil fuels, and they increased the amount each year until 2020, when COVID put a damper on lending. In other words, the biggest banks are actively increasing the risk of financial instability due to fossil-fuel assets losing value. And they are also increasing the risk to the financial system from climate harms.

What should the Fed do differently on climate-related financial risk?

Under Chair Powell, the Fed has taken no meaningful action. It has joined an international study group, mentioned climate in a couple of reports, and set up two committees that haven’t acted. Moreover, all of these actions came only after President Biden was elected, raising the question whether Powell is simply doing the bare minimum on climate to win renomination. There’s plenty the Fed can and should be doing:

  • The Fed should make clear to the banks it regulates that it’s operating under a precautionary principle, erring on the side of safety when it comes to climate-related risks—and that it expects banks to do the same.
  • The Fed should incorporate climate into how it supervises risk-taking by the largest banks, making clear that banks need to start taking the risks of fossil fuel assets and climate-related harms seriously.
  • Part of the Fed’s mission is to make sure that banks invest in low-income communities and communities of color. There is a tight nexus between these communities and those on the front lines of climate harms. The Fed should integrate climate into its oversight of community investment, fostering resilience and equitable, green investments in climate-vulnerable communities.
  • The Fed should require modeling exercises that would help it assess whether banks are resilient to near-term climate-related shocks and are on prudent pathways for the long term. 
  • The Fed should also integrate climate into a broader set of regulatory tools—requiring banks to hold more capital in proportion to climate risk and limiting fossil fuel finance by restricting the riskiest assets, policing concentrations of climate-related risk, and requiring banks to begin closing the wide gap between their current lending practices and what science says is necessary to keep the global climate safe for humanity.

At present, the biggest banks are aiming the financial system and the economy at near-certain disaster. More than any other U.S. regulator, the Fed has the power and responsibility to require them to change course. We need leadership at the Fed that takes this mission seriously and won’t just sit by while Wall Street recklessly fuels world-historic destruction.

Sign our petition telling Biden to nominate a Fed Chair who will take action on climate-related risks.