Fed's Brainard Says Climate Change Already Damaging Economy, Calls for Standardized Disclosures

Chris Gaetano
Published Date:
Feb 18, 2021
Federal Reserve Governor Lael Brainard, in a recent speech, said that financial institutions and other businesses must face the fact that the economic damage wrought by climate change is not some distant concern but something happening right now in today's world. Brainard pointed to the rising numbers of extreme weather events that she said have taken a toll on the global economy.

"Extreme weather events have been shown to disrupt corporate supply chains and impact corporate profitability. Chronic flooding and sea level rise negatively impact property values.These events are expected to increase in frequency and severity over time, which could impact borrower creditworthiness or collateral values," she said.

Brainard noted that natural disasters have resulted in more than $5.2 trillion in losses globally since 1980; with such disasters on the rise, it is imperative that financial institutions and businesses take this problem seriously and address both physical risk as well as transition risk (the costs of fighting climate change). Brainard said that they have a responsibility to ensure that they are resilient to all material risks, including those related to climate change, both currently and into the future. She has been encouraged by what she's seen so far, with lenders encouraging borrowers to adapt to and manage the risks associated with a changing climate, responding to investors' demands for climate-friendly portfolios, and funding critical private-sector initiatives to move toward more climate-friendly business models.

But more needs to be done, she said. Further progress will require a sustained commitment—both from financial institutions and their regulators—to invest in expertise, modeling and data, and a willingness to learn and improve over time. Vital to this effort, though, will be the development of better metrics and models to track progress or the lack thereof on this front, which in turn requires the development of uniform data standards and metrics for disclosures will be critical to adequately identify and compare climate risks across businesses and sectors. While current voluntary disclosure practices are an important first step, Brainard said that they are prone to variable quality, incompleteness, and a lack of actionable data.

With this in mind, Brainard called for standardized, reliable and mandatory disclosures that could provide better access to the data required to appropriately manage risks. In this, she echoes recent discourse in the environmental, social and governance (ESG) reporting world. The Global Reporting Initiative recently called for ESG disclosure mandates, saying the voluntary approach has not worked; it has also partnered with other major framework organizations to develop a unified reporting system that incorporates many different paradigms; two of those partners, the International Integrated Reporting Council (IIRC) and the Sustainability Accouting Standards Board (SASB) have also announced a merger motivated at least in part at narrowing the field and cutting down on some of the confusion in this space.

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