Banks’ destructive lending decisions are threatening the habitability of our planet and exposing all of us to higher risk from financial meltdowns. The Fed is supposed to guard against this, and serve the public interest. It’s time it stepped up to the plate.

In a recent speech that can only be described as pedalling a version of climate denial, Federal Reserve Governor Christopher Waller said that climate change does not pose “a serious risk to the safety and soundness of large banks or the financial stability of the United States.” According to Governor Waller, the “risks posed by climate change are not sufficiently unique or material…” 

It’s not clear what evidence Waller is tapping on to back up such a ludicrous assessment of climate risks and its potential impacts. It is now well established that climate change poses a systemic risk to the financial system and the wider economy, a fact the Fed itself previously acknowledged. Waller’s statement also stands in direct contradiction to the view of the Financial Stability Oversight Council (FSOC), which has declared “climate-related financial risks as an emerging threat to the financial stability of the United States.”

By ignoring the growing evidence for, and the significance of, climate-related financial risks, Waller is playing into the kind of climate denial currently being pushed by fossil fuel interests and its political allies — one need only look at the growing attacks on sound and sustainable investment practices to see the similarities.

Unfortunately, Waller’s comments are aligned with Fed Chair Jerome Powell’s remarks made earlier this year, where Powell seriously downplayed the role the Fed should play in tackling climate change. For many reasons, Powell’s stance on the matter is misguided and shortsighted. In practice, this has meant that the Fed has dragged its feet on climate for too long, to the detriment of our planet and our economy.

CLIMATE RISKS ARE REAL AND SIGNIFICANT

The physical impacts of climate change are undeniable and mounting. According to the National Oceanic and Atmospheric Administration, so far in 2023 the U.S. has already been hit by seven billion-dollar extreme weather events. And in 2022, the U.S. saw 18 separate climate-related disasters costing over $165 billion. Extreme weather events are hitting all parts of the country, increasing economic costs and leaving banks, especially regional and community banks, exposed to heightened risks if borrowers fail to repay loans, or for example when housing and farms are destroyed.

To make matters much worse, U.S. banks remain heavily invested in fossil fuels — assets that are bound to lose their value as the transition to renewable energy continues to gather speed, with the potential to cause significant economic disruption. 

Despite the glaring evidence that Wall Street does not intend to wind down fossil fuel financing in time to avert the worst of climate change, the Fed has not yet taken any meaningful steps to rein in banks’ destructive lending practices. And if the bubble bursts, like with the 2008 subprime mortgage crisis, ordinary people, particularly the most vulnerable communities, will be left to foot the bill. 

THE FEDERAL RESERVE MUST TAKE BOLDER ACTION

The recent bank failures should serve as a wake-up call for what happens when regulators get too cosy with banks and allow risks to fly under the radar. A good amount of blame for the failure of Silicon Valley Bank (SVB) can be placed with Powell, who supported deregulation in 2018 and generally allowed weak supervision to prevail. The Fed cannot afford to make the same mistakes when it comes to climate change.

The consequences of not taking climate risks seriously are far more dangerous. Unlike what happened in the aftermath of SVB’s failure, where an unprecedented  coordinated government response managed to stave off a system-wide collapse, a climate-driven financial crisis could have potentially catastrophic and irreversible impacts. That’s because, contrary to what Waller believes, climate risks are unique and material. 

Emergency measures taken after a climate-induced crash may not suffice to contain such a meltdown. The Fed, amongst the most powerful financial regulators, must therefore take proactive steps to prevent a financial crisis driven by unchecked climate risks. Central banks across the world are moving forward in this respect. The Fed, however, has failed to keep up and isn’t showing signs of making any decisive progress this year. 

WHY THE PUBLIC NEEDS THE FOSSIL FREE FINANCE ACT

Despite the lack of direct public accountability, there remains an avenue for change to move the Fed so that it serves the public interest. One tool ordinary people can use right now is the Fossil Free Finance Act (FFFA). Re-introduced on March 30th, 2023 by Senator Ed Markey (D-MA) and Representative Ayanna Pressley (D-MA-7), this bill would require the Fed to mandate that the biggest banks stop financing climate chaos and deforestation, and instead align their activities with credible science-based emissions targets. The Fed would do this by requiring banks with over $50 billion in assets to submit and adhere to transition plans for achieving zero financed emissions by 2050.

The FFFA would not require the Fed to do anything it cannot already do under its current mandate. This bill simply directs the Fed to use its existing authority to rein in big banks’ fossil fuel financing and therefore address climate risks, as it should already be doing. 

Here’s Bill McKibben (environmentalist, author and founder of 350.org and ThirdAct.org) explaining the importance of this legislation:

Big news: @SenMarkey and @RepPressley (D-MA-7) are reintroducing the Fossil Free Finance Act (FFFA) to require big banks to establish science-based transition plans to lead us toward a clean energy future. @billmckibben on the importance of this legislation. pic.twitter.com/UAC7GIT8fl

— Third Act (@ThirdActOrg) March 31, 2023

Although the Fed is conducting climate scenario exercises — analysing the exposures of six large banks to climate risks — and has released climate-risk management principles, these measures fall far short of requiring banks to change their lending practices. The climate scenario exercise, for example, has no regulatory teeth. It is merely an “exploratory” exercise, using inadequate scenarios that grossly underestimate climate risks and how they interact.

It’s clear the Fed is taking too long to do too little, digging for more information when now is the time for bold action. That’s why we need the FFFA, which presents a clear opportunity for ensuring democratic accountability at the Fed. 

THE FED SHOULD ACT IN THE PUBLIC INTEREST

Underneath all the technicalities, the fact remains that the Fed’s negligence on climate puts ordinary people at greater risk. The Fed cannot afford to stall action any further, as Governor Chris Waller and Chair Jerome Powell would have it do.

Banks’ destructive lending decisions are threatening the habitability of our planet and exposing all of us to higher risk from financial meltdowns. The Fed is supposed to guard against this, and serve the public interest. It’s time it stepped up to the plate and used its tools to bolster economic security and resilience. 

To learn more about the Fossil Free Finance Act and for ways to get involved sign-up for this upcoming webinar on June 6th co-hosted by Positive Money US, and check-out this resource!