Background

Within days of taking office, President Biden signed an Executive Order calling for a “whole of government” approach to combatting climate change by “deploy[ing] the full capacity of its agencies to combat the climate crisis to implement a Government-wide approach that reduces climate pollution in every sector of the economy.”[1] A federal agency under particular pressure to engage on climate change is the Board of Governors of the Federal Reserve System, even though it is an independent agency and, therefore, not subject to the Executive Order.[2]

What Is the Federal Reserve System?

The Federal Reserve System (“Federal Reserve”) is the central bank of the United States and its functions include conducting the nation’s monetary policy, promoting stability in the financial system, and regulating the financial industry.[3] The Federal Reserve is overseen by a central governing Board of Governors consisting of seven Governors, including a Chair, who are appointed by the President and confirmed by the Senate.[4] The Board of Governors (“Fed Board”) is an independent federal agency whose members guide the Federal Reserve’s monetary policy decisions, like setting interest rates, and oversee the twelve Federal Reserve Banks across the country.[5] Recently, there have been increased calls for the Fed Board to take climate change into account in its regulatory and monetary policy decisions.

How Has the Federal Reserve Engaged on Climate Change?

Over the past year, the Fed Board has begun to take action on climate change, signaling that climate will be a factor in the Federal Reserve’s decision making moving forward. The 2020 Federal Reserve Board Financial Stability Report, which documents potential risks to the financial system, mentioned climate change for the first time.[6] “Federal Reserve supervisors expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks,” the report said.[7] The Fed Board announced[8] last year that it would formally join the Network of Central Banks and Supervisors for Greening the Financial System, a coalition of global central banks which share best practices and contribute to the development of climate risk management tools for the global economy.[9]

In March 2021, Fed Governor Lael Brainard announced that the Fed Board will create two internal committees, the Financial Stability Climate Committee and the Supervision Climate Committee, to begin exploring the risks that climate change poses to the financial system and how to address them.[10] Then, Brainard announced in October 2021 that the Fed Board would be providing large U.S. banks with scenario analysis tools to model the economic risks to the banks and potential risk exposure the banks face related to climate change.[11] All of these announcements in quick succession make clear that the Fed Board is beginning to take the threat of climate change to the financial system more seriously than ever before.

What else could the Federal Reserve do?

Many climate activists believe that the Federal Reserve could be doing much more to combat climate change and are pushing for it to take a more active approach. Much of the ire has been directed at Fed Board Chairman Jerome Powell, whose four-year term expires in February 2022.[12] Powell said in June 2021 that the Fed Board does not consider climate change when formulating monetary policy.[13] One idea that Powell has warmed up to is incorporating climate into the Fed Reserve’s annual stress tests of the banks.[14] The Dodd-Frank Act, passed in the wake of the 2008 financial crisis, mandates that the Federal Reserve conduct annual “stress tests” of large U.S. banks to test whether they have sufficient capital to absorb losses in potential adverse economic conditions.[15]

But some climate activists would like to see the Federal Reserve go further. One major push is to mandate financial institutions to institute “capital requirements” for carbon-producing assets.[16] This would require banks with investments deemed climate risks to hold more capital to absorb losses, and, in effect, encourage divestment from carbon-producing assets.[17] Chairman Powell has rejected aggressive tactics like this, saying that the Federal Reserve does not have a “secondary mandate to support the economic policies of the government.”[18]

The fight about the Federal Reserve’s role in climate change is playing out right now over the next Fed Chair. President Biden is expected to nominate the next Fed Chair in the coming weeks and climate activists have come out strongly in opposition to Chairman Powell’s renomination. 350.org, a climate organization, has called on President Biden to “appoint a real climate leader to Chair the Federal Reserve.”[19] One op-ed on the Fed Chair nomination decision was titled “The Planet Depends on the Next Federal Reserve Chair”[20] and several House progressives, including Representatives Alexandria Ocasio-Cortez, Rashida Tlaib and Ayanna Pressley, urged President Biden to nominate a Fed Chair who will “re-imagine a Federal Reserve focused on eliminating climate risk and advancing racial and economic justice.”[21] Pennsylvania Republican Sen. Pat Toomey, for his part, has been critical of the steps the Federal Reserve has already taken on climate change, saying it has begun engaging in “politically-charged research.”[22] Given that the Fed Chair must be confirmed by the Senate, there is sure to be significant resistance from conservatives if President Biden does take the step of nominating a Fed Chair who favors reforming the Federal Reserve into a more climate-active institution.

While the Federal Reserve has refrained from taking certain steps that many activists have proposed, like many institutions that failed to act on climate for so long, it will play a role in combatting climate change in the future.

 

[1] Exec. Order No. 14008, 86 Fed. Reg. 7619 (Jan. 27, 2021).

[2] See, e.g., Press Release, 350.org, UPDATE: ‘Fossil Free Federal Reserve’ campaign shifts from in-person to remote action around this week’s Economic Policy Symposium (Aug. 17, 2021) [https://perma.cc/B672-XMY8].

[3] Overview of the Federal Reserve System, Board of Governors of the Federal Reserve System, 1 https://www.federalreserve.gov/aboutthefed/files/pf_1.pdf [https://perma.cc/QN5N-FWVS] (last visited Oct. 9, 2021).

[4] Id. at 3.

[5] Id. at 6.

[6] Financial Stability Report, November 2020, Board of Governors of the Federal Reserve System, 1, 59 (Nov. 2020).

[7] Id.

[8] Press Release, Board of Governors of the Federal Reserve System, Federal Reserve Board announces it has formally joined the Network of Central Banks and Supervisors for Greening the Financial System, or NGFS, as a member (Dec. 15, 2021) [https://perma.cc/68MQ-HYQL].

[9] Origin and Purpose, NGFS, https://www.ngfs.net/en/about-us/governance/origin-and-purpose [https://perma.cc/3E4K-6XD9] (last visited Oct. 9, 2021).

[10] Jeff Cox, Fed sets up panels to examine risks that climate change poses to the financial system, CNBC (Mar. 23, 2021), https://www.cnbc.com/2021/03/23/fed-to-examine-risks-climate-change-poses-to-financial-system.html [https://perma.cc/8W3V-TJ9D].

[11] Nick Timiraos, Fed’s Brainard Says Banks Likely to Need Direction From Regulators on Managing Climate Risks, Wall Street Journal (Oct. 7, 2021), https://www.wsj.com/articles/feds-brainard-says-banks-likely-to-need-direction-from-regulators-on-managing-climate-risks-11633615200 [https://perma.cc/8R87-XZN5].

[12] Board Members, Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/aboutthefed/bios/board/powell.htm [https://perma.cc/7SU5-NXZF] (last visited Oct. 9, 2021).

[13] Jeff Cox, Powell says climate change is not a main factor in the Fed’s policy decisions, CNBC (June 4, 2021), https://www.cnbc.com/2021/06/04/powell-says-climate-change-is-not-a-main-factor-in-the-feds-policy-decisions.html [https://perma.cc/H3VM-RU67].

[14] Id.

[15] Stress Tests and Capital Planning, Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/supervisionreg/stress-tests-capital-planning.htm [https://perma.cc/B5CF-W5Q9] (last visited Oct. 9, 2021).

[16] Becca Ellison and Adele Shraiman, 5 Steps The Next Federal Reserve Chair Must Take To Address Climate-Related Financial Risk, Evergreen Collaborative, 1, 9 (Aug. 2021).

[17] Id.

[18] Cox, supra note 13.

[19] Press Release, 350.org, UPDATE: ‘Fossil Free Federal Reserve’ campaign shifts from in-person to remote action around this week’s Economic Policy Symposium (Aug. 17, 2021) [https://perma.cc/B672-XMY8].

[20] David Dayden, The Planet Depends on the Next Federal Reserve Chair, The American Prospect (Aug. 27, 2021), https://prospect.org/environment/the-planet-depends-on-the-next-federal-reserve-chair/ [https://perma.cc/3U6W-SPFX].

[21] Victoria Guida, AOC, Tlaib, Pressley call on Biden to dump Powell as Fed chair, POLITICO (Aug. 30, 2021), https://www.politico.com/news/2021/08/30/aoc-tlaib-pressley-biden-powell-fed-507673 [https://perma.cc/6F55-JL9E].

[22] Jeff Cox, Sen. Toomey accuses the Fed of overstepping on climate change and other social issues, CNBC (Mar. 29, 2021), https://www.cnbc.com/2021/03/29/climate-change-sen-toomey-claims-fed-overstepped-on-social-issues.html [https://perma.cc/AV2F-2MNH].