Fed claims climate risks

Fed claims climate risks are outside of current scope

The warnings have been coming thick and fast. From the world’s central banks, to leading academics and regulators – many believe the global financial system faces a serious and potentially catastrophic fallout from climate change risks.

Acute weather-related events like floods, storms and droughts, could substantially reduce the value of assets, decrease investment income and increase insured and uninsured losses, according to numerous academic studies.

But Jerome Powell, chair of the US Federal Reserve – arguably one of the most influential people in the financial world – might need more convincing.

No fewer than 20 Democratic senators warned Powell in a letter earlier this year that the Fed must do more to mitigate the risks climate change posed to American financial institutions.

However, in his response to the letter (which contained the startling fact that the USA’s 238 weather and climate disasters cost the country over $1.5 trillion between 1980 and 2018), Powell said climate-related risks do not fit squarely within the Fed’s existing framework for assessing financial stability.

Powell made it clear he would prefer to “rely on ongoing research by academics, our staff, and other experts to improve our understanding and measurement of such longer-run or difficult to quantify risks.”

On the other side of the fence, a number of Powell’s peers have taken a more pressing stance to climate change and its direct impact on the financial markets.

In an open letter in April, the Bank of England’s governor Mark Carney, along with governor of Banque de France François Villeroy de Galhau, and chair of the Network for Greening the Financial Services Frank Elderson, expressed their deep concerns.

They stated that a massive reallocation of capital would be required to achieve the net zero carbon emissions target by 2050. “If some companies and industries fail to adjust to this new world, they will fail to exist,” the open letter forewarns.

Glenn Rudebusch, the San Francisco Fed’s executive vice president for research, said climate-related financial risks could affect the economy through elevated credit spreads, greater precautionary saving, and, in the extreme, “a financial crisis,” in a report in published in March.

And speaking at a Commodity Futures Trading Commission meeting last month, US commissioner Rostin Behnam warned the impacts of climate change affect every aspect of the American economy – “from production agriculture to commercial manufacturing and the financing of every step in each process.”

But if the world, and indeed Powell, needed more immediate evidence that climate change will have vast repercussions for the financial sector – it might be wise to look at the recent misfortune suffered by the world’s biggest fund group, BlackRock.

Earlier this month, a report from the Institute for Energy Economics and Financial Analysis (IEEFA) revealed BlackRock has lost an estimated $90bn over the last decade by continuing to invest in oil and fossil fuel companies that were falling in value as the world moves to a more low-carbon environment.

Investments in oil companies Chevron, Shell, BP and were responsible for the bulk of its losses.

Separately, the world’s largest human rights organisation, Amnesty International has also taken action. This month it announced it will divest from fossil fuel companies, stating it wants to send a clear message that continued investment in coal, oil and natural gas companies is at odds with human rights and its efforts to improve the climate.

Since the launch of its divestment movement in 2011, more than 1,110 investors with $9.94 trillion in assets have committed to divest, according to its website.

These types of divestments, which are likely to continue as the world becomes more socially responsible, undoubtedly creates volatility not just for investors and companies, but the economy at large – especially if the financial world fails to prepare for this sea change.

Last Updated: 9 August 2019
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