Not enough or too much: divided opinions on the Fed’s climate guidance

Comments from stakeholders on the Federal Reserve’s proposed climate guidance run the gamut between calling for more action from the central bank to demanding that it stop entirely.

The proposed guidance includes principles for managing climate-related financial risks among US banks with over $100bn of assets, and followed earlier proposals from the Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation. The three agencies are expected to jointly issue final guidance soon.

Several left-leaning advocacy groups recommended that the Fed’s final guidance ensures continued and expanded access to banking services in communities of colour. They fear that the focus on banks’ climate-related financial risks could cause them to stop lending in minority communities affected by climate change, a practice known as “bluelining”.

For example, Americans for Financial Reform argued that the Fed “must encourage banks to enhance operational resilience and expand physical access to banking in Black, Latino, Asian American and Pacific Islander, and Native communities” and “must discourage banks from implementing risk mitigation measures that rely on avoiding or raising rates in climate vulnerable areas resulting in disparate impacts”.

The Public Interest Research Group echoed the sentiment, explaining that it is “concerned about a lack of access to affordable loans if banks increase their interest rates or pull their services from climate-vulnerable areas altogether.” Both the Natural Resources Defense Council (NRDC) and National Community Reinvestment Coalition concurred.

Right-leaning advocacy groups uniformly opposed the Fed’s proposal, claiming it would have no meaningful impact on climate change, and could potentially be illegal. The Chamber of Commerce questioned whether regulators are “running afoul of the major questions doctrine”, a new supreme court rule that limits government agencies in tackling issues of great national importance without clear authority from Congress. Conservatives are also using this ruling to attack the Securities and Exchange Commission’s proposal for climate disclosures.

Similarly, the Mercatus Center argued that the proposal “could open the door to Federal Reserve policies becoming too sensitive to political issues which may decrease the independence of Federal Reserve policies from congressional politics”, and called for increased capital requirements across the board instead.

Other conservative groups argued that the Fed’s guidance would harm the economy. The National Federation of Independent Business argued that the guidance would have a detrimental effect on small businesses. Heritage claimed the Fed failed to offer an economic analysis and that using climate considerations could actually increase the amount of financial systemic risk. Both the American Enterprise Institute and the American Institute for Economic Research argued that financial institutions may not be affected by climate-related risks and that the proposal, at minimum, contains assertions “inconsistent with the evidence on climate phenomena”.

Commenters were also divided over whether the guidance should apply to institutions with less than $100bn in consolidated assets. The Independent Community Bankers of America and American Bankers Association argued that the Fed “should not apply its proposed principles or any climate-related financial risk framework to community banks with fewer than $100bn in assets.” Public Citizen, NRDC, and Better Markets disagreed, with the former explaining that smaller financial institutions need regulation  to ensure their “safety and soundness”.

Several commenters argued that the Fed needs to do more to encourage consistency between the US and foreign jurisdictions. The Japanese Bankers Association wrote that “in order to avoid duplicative or different requirements for banks, we would like to ask the Fed to continue to coordinate with international standard setting bodies and jurisdictional supervisors”. The Institute of International Finance similarly explained that “climate risk is a global issue that warrants a coordinated approach across jurisdictions” and called for increased clarity for foreign banking organisations.

Commenters also discussed areas where additional clarification could be helpful. Better Markets argued that the Fed should “set an expectation that banking institutions look to available, internationally agreed-upon and published metrics and best practices for use as a benchmark” and “promote minimum standards for measurement of climate risks”. The American Bankers Association requested clarification that the guidance does not require banks to “adopt lending limits related to climate-related financial risk regardless of materiality”.

Meanwhile, Public Citizen asked for “more detailed direction on how to address the unique characteristics of climate-related risks and integrate them into existing risk management processes”. A joint letter from the Environmental Defense Fund and Institute for Policy Integrity encouraged the Fed to “consider offering more detailed guidance regarding the physical and transition risks that affect the management of various risk areas” and “guiding banks on the use of relevant, accurate, and timely climate-related data for risk management and reporting”.

In addition to its climate-related financial risk guidance, the Fed also recently released details of the pilot climate scenario analysis that it expects for the six largest US banks to undertake.