Banks for the planet: The future of financing

When large and influential institutions that are not typically at the forefront of climate conversations take climate policy action, I pay attention. The impact may not seem immediate, but the ramifications tend to be huge. These institutions can affect governments, the global flow of money, how — and whether — climate change is managed, and ultimately the lives of millions.  

Last week, when the U.S. Federal Reserve Board joined other banking regulators in putting forth a plan for how large banks should manage climate-related financial risks, I took note. When it comes to climate action, the signs aren’t just on the wall anymore: Change is happening across some of our more conservative institutions — especially those regulating the flow of money. 

The plan put forward is for banks with more than $100 billion in assets, and it covers how banks should incorporate financial risks related to climate into their strategic planning. The board approved putting the proposal out to the public for comment by a 6-to-1 vote. 

When we discuss the financial impacts of climate change, there’s the obvious consequences — rising sea levels, worsening floods, fires and droughts that threaten financial assets and markets. However, government policies for managing climate-risks, and transitioning away from fossil fuel industries in exchange for green energy holds tremendous potential to impact — dare I say, wipe out — trillions of dollars of assets around the globe. This reality has the Fed concerned; they stated that, combined, these “pose an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States.” 

So, what has the Fed proposed? Their plan would require banks to include climate-related financial risks in their audits and other risk management. It would require them to add climate-related scenario analysis to traditional stress testing. Banks are also being asked to assess whether they should include climate-linked risks into their liquidity buffers. 

But even the board itself was not in full agreement, as the Fed chair dissented. Nevertheless, it’s noteworthy that the Fed has gone ahead with its proposal, joining other institutions like the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) that have each developed their own proposals for managing climate risks. 

There are people who believe that climate-change is a low risk and that the systems we have created — including financial ones — are sufficiently robust to remain stable. The actions of the Fed and other institutions should be a wakeup call that they are not, unless we take action.  

The proposal is currently open for public comment.

Deborah Brosnan, Ph.D., is an environmental scientist and a marine resilience specialist, working to bolster science in decision-making involving the environment, endangered species, energy development, sea-level rise, climate change and environmental hazards.