Federal Reserve official says climate change isn’t a serious financial risk

“Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States,” Waller said at a conference in Madrid. “Risks are risks. There is no need for us to focus on one set of risks in a way that crowds out our focus on others.”

“My job is to make sure that the financial system is resilient to a range of risks,” he added. “And I believe risks posed by climate change are not sufficiently unique or material to merit special treatment relative to others.” 

The Fed governor didn’t discuss the US economy or outlook for monetary policy in his prepared remarks.

Waller, who was appointed by former President Donald Trump, dissented in December 2022 from the Fed’s proposed guidelines that lenders with more than $100 billion in total assets could use to safely deal with climate-related financial risks. The Fed draft guidance seeks to deal with possible risks tied to credit, liquidity and other areas. 

Many central banks in recent years have come to terms with the idea that climate change exposes national economies to new kinds of financial risks, in degree and in kind. A smaller subset, including Singapore and South Africa, have taken on clean development as a policy goal. Stress tests, climate-risk disclosures and, more controversially, banks greening their portfolios are all in play as general tools.

Waller said climate-related events – fires, hurricanes and natural disasters – could be devastating to local communities without being material to the overall US economy. While climate changes could affect property values in individual cities, there’s no evidence of a broader risk, he said. 

The US and Canada are among the just under half of banks that don’t have climate mandates, according to a 2021 study. Fed Chair Jerome Powell has generally read the organization’s role as primarily bank supervision.

“Central banks have been widening their mandates in times of crisis,” analysts for BloombergNEF wrote in March. “If central banks don’t intervene, financial markets could suffer from losses that would impact the real economy,” BNEF wrote. “It falls on them to prevent that, even under their traditional role, meaning that climate change will slowly bleed into their mandate.”

Scientists in recent years have begun to warn about unprecedented risks that have rarely or never occurred before, such as “compound events” that bring simultaneous or back-to-back disasters. American researchers in 2022, for example, highlighted the rising risk of extreme rainfall right after wildfires in the Western US. By the end of the century, this scenario could increase by 100% in California and by 700% in the Pacific Northwest.

Beyond physical risks, the banking system faces uncertain “transition risks” that result from the economy decarbonizing without their help.

–With assistance from Matthew Boesler.