Fed Reserve Governor Brainard Favors Mandatory Corporation Climate Change Risk Disclosures

In a recent speech, Federal Reserve Governor Lael Brainard said the Fed is working to improve its understanding of climate risk while also “taking steps to mitigate the risks.” While not speaking for the entire Fed Board of Governors, Brainard said that she wants mandatory disclosures on corporate climate risks.

“The long-time horizon associated with climate change, the lack of historical data, the potential for sudden shifts in asset valuations, and the paucity of information on the climate-sensitivity of exposures complicate the translation of climate-related risks into measures of credit, market, liquidity, reputational, and operational risks,” Brainard said.

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A CFTC report that was released last year identified climate change “… as the biggest long-running risk to the financial system.”

In 2017 there was an international best practices climate risks assessments meeting of the Central banks. Brainard seeks to pull together the rules and goals of “our fragmented response” to overseeing the markets and the regulatory agencies, which include the Treasury, Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Financial Stability Oversight Council.

Former Fed Reserve Governor Daniel Tarullo and current republican members of congress have pushed back on previous suggestions like Brainard’s to use “scenario analysis” to assess risks to banks instead of including climate change in the Fed’s annual bank stress tests.

Tarullo pointed out that the Fed can learn from the climate stress test The Bank of England is about to launch.

Recently, nearly 50 U.S. House Republicans sent a letter to the Federal Reserve Board expressing concern over the Fed’s consideration of including climate change in the “stress test” for regulated banks.

Big Banks and Asset Management firms like Blackrock are directing more money to exchange traded funds (ETFs) that tout environmental, social and corporate governance (ESG) practices.

Last month, the Fed, for the first time, included climate among the risks outlined in its Financial Stability Report.

In the final days of his Administration, President Trump, with the support of Congressional Republicans, attempted to limit how big banks and fund managers can use ESG factors as a sole investment determiner.

The U.S. Department of Labor finalized a rule to limit private retirement plan manager’s leeway to invest based on ESG factors.

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