WASHINGTON — The Federal Reserve is joining a network of central banks and other financial regulators focused on conducting research and shaping policies to help prepare the financial system for the effects of climate change.
The Fed’s board in Washington voted unanimously to become a member of the Network of Central Banks and Supervisors for Greening the Financial System, it said in a statement Tuesday. The central bank began participating in the group more than a year ago, but its formal membership is something that Democratic lawmakers have been pushing for and that Republicans have eyed warily.
The Fed’s halting approach to joining underlines how politically fraught climate-related issues remain in the United States.
The network exists to help central banks and other regulators exchange ideas, research and best practices as they figure out how to account for environment and climate risk in the financial sector. While the Fed had participated informally, its decision to join as a member is the latest sign of its recognition that the central bank must begin to take extreme weather events into account as they occur with increasing frequency and pose a growing risk to the financial system — whether doing so is politically palatable or not.
“The public will expect that we do figure out what are the implications of climate change for financial stability, and that we do put policies in place,” Jerome Powell, the Fed chair, said this month at a Senate hearing. “The broad response to climate change on the part of society really needs to be set by elected representatives — that’s you. We see implications of climate change for the job that you’ve given us, and that’s what we’re working on.”
Still, the latest move could incite a backlash. The announcement comes shortly after Republican House members urged Powell and the vice chair for supervision, Randal Quarles, in a letter Dec. 9 not to join the network “without first making public commitments” to accept only policies that would not put the United States at a disadvantage or have “harmful impacts” on American bank customers.
Republicans have been particularly concerned that increased attention to climate risk by financial regulators could imperil credit access for fossil fuel and other energy companies. For instance, banks might be less likely to extend credit to those industries if regulators viewed such loans as risky and made them harder to provide.
Powell had recently emphasized that the Fed was likely at some point to join the network alongside its peers, including the Bank of England and Bank of Japan, and the central bank first indicated last month that it would soon be joining the group. Quarles said during congressional testimony that the Fed was in the process of requesting membership and expected that it would be granted, in response to questions from Sen. Brian Schatz, D-Hawaii.
“Now that they have joined this international effort, I will expect them to take further concrete steps towards managing climate risks,” Schatz said in a statement in response to the announcement Tuesday. “That includes setting clear supervisory expectations for how banks should manage their climate risk exposure, and using tools like stress testing to hold them accountable.”
The Fed did not comment on why it decided to join now and — despite several requests since Quarles’ statement — would not say when the central bank had applied to join. Joining the network requires a formal email request from a central bank’s leader or head of supervision.
The move is the latest step in an evolution in which the Fed, which once rarely spoke publicly about the issue, has paid more public attention to climate change.
The Federal Reserve Bank of San Francisco, led by Mary Daly, held the system’s first conference on climate last year. Lael Brainard, a Fed governor and the lone Democrat on the central bank’s board in Washington, spoke there, and she has delivered other remarks on the topic. For the first time, the Fed’s financial stability report this year included an in-depth section on financial risks posed by climate change.
Even so, the Fed has been more reticent than many of its peers when it comes to embracing a role in working to alleviate climate change and manage its fallout. The Bank of England has unveiled its plans to run banks through climate stress tests — which will test how their balance sheets will fare amid extreme weather events — although they have been postponed by the coronavirus pandemic. The president of the European Central Bank, Christine Lagarde, has indicated that her central bank is considering whether it should take climate into account when buying corporate debt.
Climate change is a partisan topic in the United States, so more aggressive action to combat it could open up the Fed — which prizes its independence — to political attack. The Trump administration denied or questioned the science behind climate change, and although the incoming administration of Joe Biden is poised to make it a top issue, many Republican lawmakers stand ready to police the Fed’s embrace of climate-related policy.
“I’m going to be raising this issue much more vociferously — I think my colleagues will as well,” Rep. Andy Barr, R-Ky., the lead signatory on the Dec. 9 letter, said in an interview Monday. Barr said he was concerned that the Fed might move toward carrying out climate stress tests or put in place other policies that would make it harder for oil and coal companies to gain access to credit.
Democrats will struggle to get policies like the so-called Green New Deal through Congress, he said, and he worries they will try to carry out their policy objectives through the “back door” of financial regulation. Barr said both Quarles’ statement that the Fed would be joining the Network of Central Banks and Supervisors for Greening the Financial System and Powell’s recent comments caught his attention.
“The enormous power of the Fed should not be weaponized to discriminate against a wide swath of American industry,” he said.
But in a demonstration of the competing pressures on the central bank, groups that applauded the Fed’s announcement Tuesday painted joining the network as merely a first step.
“Given that it is responsible for the safety and security of the world’s largest economy, we hope that it will not only catch up with central banks around the world but, in time, lead the way in addressing systemic financial risk,” Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, said in a statement. The group works with investors and has been pushing for the Fed to join the network, including in a report and letter this year.
“Our economy deserves no less,” Rothstein said.