US lawmakers press Powell and Yellen on climate

Members of the United States Congress have challenged newly-renominated Federal Reserve chair Jerome Powell and Treasury secretary Janet Yellen over their plans to address climate risks to the financial system.

During a routine hearing with the House of Representatives Financial Services Committee, Powell and Yellen were repeatedly criticised for US regulators’ slow progress in developing policies to mitigate climate risk relative to their foreign counterparts.

Powell sought to provide reassurance that the Fed will take the necessary action in due course, confirming its intention to issue climate risk guidance and integrate climate considerations into monetary policy. But he did not provide a firm timeline as to when these steps would be taken.

Rashida Tlaib, a Democratic representative from Michigan, asked Powell if the Fed will join the Office of the Comptroller of the Currency (OCC) in issuing supervisory guidance by the end of 2021 on how large banks should factor climate change into their risk management frameworks.

Powell responded that the Fed is in discussions with the OCC, and there is a desire among all agencies for their guidance to be consistent. But he said the Fed is not yet in a position to take part in that specific initiative.

Tlaib asked whether the Fed will follow the OCC in conducting climate risk assessments during examinations of large banks in 2022. Powell said that it is already deep in dialogue with the largest institutions.

“On behalf of my residents, I hope dialogue turns into guidance and accountability,” Tlaib said in response.

Powell later confirmed that the Fed is following the European Central Bank (ECB) in developing a comprehensive assessment of how banks are meeting supervisory expectations on climate risk.

Tlaib turned to monetary policy, asking if the Fed will also follow the ECB in using climate risk to guide its operations. The ECB recently published a substantive review and analysis identifying potential problems that climate change will present for managing price stability, as well as policies it could potentially use to mitigate climate impacts.

“That’s something we’ll do in the longer run but not now,” said Powell.

Meanwhile, Alexandria Ocasio-Cortez, a Democratic representative from New York, expressed her disappointment over the contents of the recently-issued Financial Stability Oversight Council (FSOC) report on climate risk.

Referring to the recent Cop26 summit, at which the US and other participating nations agreed to reduce carbon emissions in order to keep warming within 1.5ºC, she asked Yellen why the report makes no mention of the timelines or policies needed to reach that target.

Yellen defended the report by emphasising that FSOC’s mission is “to identify threats to financial stability of the United States, and to coordinate across regulatory agencies to make sure that they’re addressed.” She pointed to the Biden administration’s other activities aimed at tackling climate change itself, such as the Build Back Better Act currently under consideration by the Senate.

Ocasio-Cortez challenged the distinction implied in Yellen’s comments between the necessity of meeting the 1.5ºC target, and the need to mitigate climate-related financial risks.

“There are substantially different financial risks between 1.5ºC, 2ºC and beyond,” she said.

She went on to highlight actions being taken by other central banks and supervisors, such as the Swiss National Bank’s decision to exclude coal investments from its holdings, and the ECB’s introduction of climate stress tests. Asked by Ocasio-Cortez if the US was being “left behind” on making the commitments required to mitigate climate-related financial risks, Powell said he was focused on the Fed’s domestic responsibilities.

Ocasio-Cortez then asked Yellen if she agreed with the assessment in the recent International Energy Association report that there is a need to consider phasing out investments in new fossil fuel supplies.

The Treasury secretary responded that although FSOC and the Fed do not have the authority to instruct banks to pursue Paris-aligned lending policies, “it’s very noticeable that at Glasgow all of the major global financial institutions voluntarily committed to align their lending with the Paris commitments. The Treasury will be monitoring very closely their performance and work.”

Powell will return to Capitol Hill in the coming weeks for Senate hearings to confirm his reappointment as Federal Reserve chair, with newly-nominated vice chair Lael Brainard also set to appear. The two have taken noticeably divergent public positions on US regulators’ approach towards managing climate risk, with Brainard more willing to highlight their slow progress.

Other jurisdictions are already “measuring, monitoring and managing climate related financial risks”, she said earlier this year. “The US has been behind and we need to catch up.”