The US Federal Reserve is playing its part in President Biden's "whole of government" approach to climate change. Having identified climate change as a financial stability risk, the Fed is now discussing with its regulated banks how they measure climate change risk and what steps they are taking to mitigate it. Responding to these questions is of course no simple task given the size of assets involved and the challenges in identifying comparable and reliable data. Banks already run a broad set of financial stress tests, but they now need to include understanding how their portfolios would perform under a range of climate change scenarios, including physical risks such as flooding, drought and wildfires, as well as sector shocks comparing how oil and gas loans would perform against renewable energy loans. Firms need to incorporate climate change planning into their risk systems now.
"Fed officials have not dictated the parameters for the analysis but have made it clear they expect lenders to conduct the internal risk-management exercises and hand over the data, the people said."