Memorandum: Federal Reserve Ignoring Systemic Climate Financial Risks
Re: Omitting biggest growing structural shift in global economy recipe for disaster
Date: Wednesday, August 23, 2023
Contact: Eren Ileri, erencan.ileri@sunriseproject.
The Federal Reserve Bank of Kansas City is set to host its 45th annual Economic Policy Symposium titled “Structural Shifts in the Global Economy” in Jackson Hole, Wyoming, starting on Thursday, August 24, 2023. Federal Reserve Chairman Jerome Powell will be addressing the symposium on Friday, which will be livestreamed starting at 10:05 am ET, and over 100 other central bankers, federal reserve officials, academics, media, financial organizations, international counterparts, and government regulators will also be in attendance.
One notable major topic has been omitted from the materials released so far: addressing systemic climate financial risk. Compared to global peers, Chair Powell and the Federal Reserve have been laggards in addressing systemic climate financial risks, putting workers, businesses, and the economy at risk.
“This summer is the time for a long overdue Jackson Hole reckoning on climate change-related financial risk and scaling up efforts to address these risks. No serious, good faith discussion of issues related to the conference’s title – ‘Structural Shifts in the Global Economy’ – is possible without substantial attention paid to the growing significance of climate financial risk,” said Jackie Fielder, co-director of Stop the Money Pipeline.
“After engaging and pushing the Federal Reserve to act on the most pressing economic matter of our time and be a world leader, they still seem to ignorantly believe that the climate emergency is not a risk to our financial stability. The Federal Reserve and Chairman Powell were reminded at the last two Jackson Hole symposiums that they must take on the role of transitioning our economy in an orderly manner or our planet and our pensions will be recklessly gambled away on fossil fuels by Wall Street bankers,” said 350 Colorado’s Defunding Climate Disaster Coordinator Giselle Herzfeld.
Regrettably, Chair Powell and the Federal Reserve have failed to act swiftly and decisively on directives to address systemic climate financial risk. The Fed hasn’t met nor addressed the most urgent risks, including:
- Failing to improve climate-related transparency and disclosure;
- Failing to mandate transition plans to decarbonize the financial and banking sectors in line with the Paris Climate Agreement and an orderly transition;
- Failing to include climate risk in regulations in response to ever-increasing material climate risks;
- Failing to fully assess climate risks for vulnerable communities; and
- Has yet to finalize the climate risk scenario analysis.
Under its mandate to maintain price stability, the Federal Reserve has an obligation to address systemic climate financial risk. Additionally, the 2008 crisis and subsequent other financial shocks, including recent bank failures, highlight the supervisory role the Federal Reserve is supposed to play in helping maintain the financial system’s stability. Under Dodd-Frank, the Federal Reserve is authorized and has a duty to establish prudential standards in order to “prevent or mitigate risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected financial institutions.”
The Federal Reserve has been instrumental in supporting the continued development and expansion of fossil fuels, and allowed U.S. banks to continue to finance climate chaos, threatening the U.S.’s financial stability and putting the economy at risk. In 2021, the International Energy Agency concluded that no new fossil fuel development or expansion should occur in order to meet the net zero goal by 2050 and avert the most extreme climate change scenarios.
Currently, there’s doubt over whether the Federal Reserve, financial institutions, and regulators truly grasp the severity of the risks. A recent report highlights that many financial institutions and central bankers are using models that underestimate the real threats of climate change. In 2022, the U.S. is ranked 16th among the G20 between Turkey and Russia on the Green Central Banking Scorecard, slipping down the table, after another year of minimal progress. The Federal Reserve has consistently gotten a score of D-, ranking amongst the lowest in G20 central banks, exemplifying how woefully inadequate the minimal action taken is compared to the risk and how the U.S. financial system is falling behind its international peers.
In the face of growing financial risks and economic instability driven by the financing of fossil fuels that fuel climate change, Federal Reserve Governor Christopher Waller recently said he does “not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States.”
In reality, climate change driven and caused by the burning of fossil fuels is already damaging and destabilizing the U.S. and global economies. The costs of weather disasters related to climate change exceeded $617 billion over the last four years in the U.S., and projections show that climate change could cost the global economy $23 trillion by mid-century. Just this summer, extreme wildfires in Canada, heat waves, and droughts all fueled by the burning of fossil fuels, impacted much of North America. One of the most deadly and devastating wildfires in U.S. history on Hawaii’s Maui island already cost over 115 lives, with hundreds still missing, and is projected to cost over $5 billion, while the Northeastern floods are expected to result in damages costing over $3 billion. This year marked the hottest July ever recorded, and extreme heat is causing the U.S. economy to lose billions in productivity each year.
Despite these alarming signs, financial institutions still back the fossil fuel industry, the top contributor to climate change. U.S. banks are also the world’s largest fossil fuel financiers, accounting for 28% ($187.2B) of all fossil fuel financing in 2022. JPMorgan Chase ($434.1B) remains the world’s worst funder of climate chaos since the Paris Agreement. Citi ($332.9B), Wells Fargo ($316.7B), Bank of America ($279.7B), and Morgan Stanley ($153.4B) are still among the top fossil financiers. Banks and financial institutions also face an estimated $1 trillion in fossil fuel stranded asset risks, with the U.S. holding one-third of the world’s fossil fuel stranded asset risks, as the economy shifts to renewable and other alternative energy sources.
If the Federal Reserve and other regulators don’t act decisively, our climate and our economy will suffer greatly. The Federal Reserve has not only a mandate but also the regulatory authority and duty to act. At last year’s symposium, climate advocates protested the Federal Reserve’s failure to act and the continued expansion of fossil fuels.
Climate Nexus is a nonprofit, pro-bono communications firm