Powell says climate stress tests will ‘very likely’ be a ‘key tool going forward’

Federal Reserve Chair Jerome Powell on Tuesday said climate stress tests will “very likely” be a “key tool going forward,” a comment that may assuage progressives’ concerns regarding his renomination to chief of the central bank.

“We are looking at climate stress tests. I think it’s very likely that climate stress scenarios, as we like to call them, will be a key tool going forward,” Powell said during his confirmation hearing before the Senate Banking Committee.

He said such tests are “very different” from stress tests that affect capital, noting that such scenarios “are really about assuring that the large financial institutions understand all of the risks that they’re taking, including the risks that may be inherent in their business model regarding climate change over time.”

Asked by Senate Banking Chairman Sherrod Brown (D-Ohio) if he will make climate stress tests a top priority if he is confirmed to another term as Fed chair, Powell said yes.

“Within supervision, as I mentioned … that is likely to be a very important priority over the coming years,” he added.

Powell in July said the central bank was “in the process of” looking at climate stress scenarios, but emphasized “we haven’t decided to do that yet.” He predicted, however, that the Fed would go in that direction.

Climate stress tests are a key concern among progressives and climate activists, many of whom had objected to Powell’s renomination. The scenarios are used to discern the resilience of financial institutions when it comes to risks involving the climate.

Some on the left had encouraged President Biden to replace Powell with an individual who would lead banks to fight against climate change, such as Fed Governor Lael Brainard, a supporter of stress tests. Biden, however, ultimately nominated her to serve as vice chair of the central bank.

Climate activists are now urging Biden to nominate a Fed vice chair of supervision who will address the risk to the financial sector that a changing climate presents, and encourage banks not to finance projects that could worsen existing problems.

Powell on Tuesday said the Fed’s role in climate change is “limited” but “an important one” when asked about the relationship by Sen. Elizabeth Warren (D-Mass.). He said the central bank’s purpose is to “assure that the banking institutions that we regulate understand their risks and can manage them.”

He also said it is the responsibility of the Fed to “look after financial stability.”

“The issue really is, can something from climate change rise to the level that would threaten the stability of the entire financial system,” he added.