Bryan Woolston/AP Photo
Climate activists protest energy policies and the use of fossil fuels, September 17, 2023, in New York.
The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
The constant barrage of fossil fuel–driven climate catastrophes is a grim reminder of what humanity faces, and the shrinking window for effective climate action. That’s why hundreds of thousands of people around the globe hit the streets over the weekend to demand a swift and equitable phaseout of coal, oil, and gas. In New York City on Sunday, campaigners made clear to the diplomats gathered at the so-called Climate Ambition Summit that anything short of a rapid and just transition to a zero-carbon society is unacceptable. Today, protesters intend to march from the New York Stock Exchange to the Federal Reserve Bank of New York, which is home to key financial regulators who have acknowledged in writing the grave economic risks posed by climate change—and the fossil fuel financing that drives it—but have so far refused to act accordingly.
Of particular interest is Kevin Stiroh, executive vice president of the New York Fed and chair of the U.S. Fed’s Supervision Climate Committee. Stiroh, his boss Michael Barr who heads the central bank’s supervisory and regulatory activity, and Fed chair Jerome Powell are the joint subjects of the activists’ ire. They collectively shoulder the blame for the Fed’s recent aggregate score of 16/130 on a leading assessment of environmental policies adopted by G20 central banks—which significantly trails top performer France’s 70/130 grade.
One might think that a central bank logically wouldn’t have much to do with climate policy. But this is wrong, because climate change threatens bankers as it does everyone.
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The world’s financiers shouldn’t expect to escape unscathed from the fires and floods, even if they helped cause them by funding a rapacious fossil fuel industry that remains heavily subsidized even as it rakes in record profits. Predatory subprime lending and the ensuing rise in underwater mortgages brought the financial system to its knees 15 years ago; what do Fed officials think will happen when large chunks of entire states are underwater or engulfed in flames? The looming wave of urban storm surges, suburban infernos, and breadbasket droughts is likely to make the devastating foreclosure-cum-financial crisis of the mid-to-late-aughts look like child’s play. Whether such a nightmare scenario unfolds depends in part on how Stiroh and Barr decide to respond to campaigners’ call to action. Apocalypse is a policy choice.
Stiroh, who has been at the New York Fed since 1999, is no stranger to financial risk. He led the regional bank’s Financial Sector Analysis Supervision Group amid the global financial crisis of 2007–2009, during which he helped design stress tests aimed at determining the banking system’s ability to weather losses. In 2009, he contributed to a report that lays out “lessons learned” from the preceding crisis and recommends better bank supervision practices. In 2015, he was appointed head of the New York Fed’s supervision group, which is tasked with overseeing financial institutions in the Second District of the U.S. Federal Reserve System—a jurisdiction that includes Wall Street.
Stiroh stepped down from that role in early 2021 when he was tapped as a senior adviser to Michael Gibson, director of the national Fed’s Division of Supervision and Regulation. From that position, Stiroh manages the Fed’s supervisory work on the financial risks of climate change. That includes chairing the recently formed Supervision Climate Committee, a system-wide initiative that brings together senior staff from the Fed board and its regional banks in an ostensible effort to better understand the economic upshots of the climate crisis.
The financial repercussions of climate change, like its negative effects on public health and biodiversity, are serious and easy to grasp as well as predict, in broad strokes. So far this year, the U.S. has endured 23 extreme weather disasters that cost at least $1 billion—a new annual record with nearly four months to go. Those calamities have killed more than 250 people, disrupted the lives of thousands more, and cost a combined $58 billion, with financial institutions like insurance companies taking much of the losses. Climate scientists have long warned that extreme weather will increase in frequency, duration, and severity with each additional increment of warming. What’s more, all these disasters happened in a world that has warmed 1.3 degrees Celsius above preindustrial levels. While signatories to the Paris Agreement pledged in 2015 to limit temperature rise to 1.5 degrees Celsius, current policies put the world on track for roughly 2.7 degrees of warming by 2100.
The financial repercussions of climate change, like its negative effects on public health and biodiversity, are serious and easy to grasp as well as predict, in broad strokes.
It’s a grim irony that from the early days of the Industrial Revolution to the present, financial firms have bankrolled the dirty-energy firms most responsible for generating heat-trapping emissions. According to the latest figures, the world’s 60 largest private banks have provided more than $5.5 trillion in financing to the fossil fuel industry since 2016. That includes over $1.5 trillion since 2021—the year the International Energy Agency stated that investments in new coal, oil, and gas extraction and infrastructure projects are incompatible with its net-zero by 2050 pathway. The same banks are currently carrying $1.35 trillion of exposures to fossil fuel assets.
In a further irony, the odds are increasing that many of those assets will be stranded now that the Inflation Reduction Act is channeling hundreds of billions of dollars toward boosting electrification and clean-energy supply. Thanks to those subsidies, and the continually plummeting price of solar and wind, carbon energy is rapidly being outcompeted in the market—one reason why demand for fossil fuels is expected to peak this decade.
What is to be done? Concretely, the Federal Reserve has numerous mechanisms it could use to mitigate climate-related financial risks. Perhaps the most important step it could take is to require systemically important financial institutions to divest from carbon-intensive industries. Not only does the Fed have the authority to accelerate the greening of the economy, but climate action ought to be a core element of its work. The Fed is responsible for macroprudential regulation, and there is no greater threat to global financial stability than the climate crisis.
To his credit, Stiroh seems to take the climate crisis seriously, at least in an academic sense. Last year, he co-authored a working paper on how climate-related financial risks might affect capital requirements. Months earlier, he wrote a working paper that sought to “clarify the concept of ‘double materiality,’ the idea that supervisory authorities should consider both the risks that banks face from climate change and the impact of a bank’s financial activities on climate change.” Although Stiroh refused to take a “normative stand on the appropriate policy” in that paper, a 2020 interview he gave suggests that he is wary of systemic risks. That should, of course, include the existential threat of climate change.
In practical terms, however, Stiroh leaves much to be desired. Since 2020, Stiroh has also served—alongside Frank Elderson, vice chair of the supervisory board at the European Central Bank—as co-chair of the Task Force on Climate-Related Financial Risks at the Basel Committee on Banking Supervision. This committee is one of nine institutions housed at the Bank for International Settlements, a “bank for central banks” headquartered in Basel, Switzerland. Last June, the task force co-chaired by Stiroh published 18 principles for the “effective management and supervision of climate-related financial risks.” In December, the panel issued guidance clarifying how central bankers should incorporate the new regulatory standards into their work.
Despite Stiroh’s leadership position at the Basel Committee, U.S. regulators have yet to acknowledge his task force’s recommendations, let alone commit to implementing them. What gives? The answer may be that Stiroh ultimately answers to Barr, and he in turn answers to Jerome Powell.
In addition to Barr’s role as Fed vice chair for supervision, he is also a member of the Standing Committee on Supervisory and Regulatory Cooperation at the Financial Stability Board. This board is one of the nine organizations with offices at the Bank for International Settlements, though it is one of three with separate legal identities and governance structures. Like the Basel Committee, the Financial Stability Board last year released a report acknowledging the need to address climate-related risks.
In late 2022, the Fed published its own draft principles for climate risk management at big banks, but as watchdog groups pointed out during the public comment period, “they are much vaguer than the detailed expectations laid out by global peers and the Basel Committee on Banking Supervision.”
Ultimately, it is Powell who runs the Fed, and he famously declared in January that “we are not, and will not be, a ‘climate policymaker.’” The Fed chair appears to be afraid of being criticized by the same congressional Republicans who have bullied SEC chair Gary Gensler over his proposals to improve oversight of the crypto industry and to mandate the disclosure of corporations’ climate-related risks. Alternatively, he might think that forthrightly acting on climate change is improper, since it would involve the Fed’s traditional policies of interest rates and banking regulation somewhat indirectly.
But the reality is that an economic institution as powerful as the Fed cannot help but be a climate policymaker. To refuse to regulate Wall Street’s compulsive lending to doomed fossil fuel companies is to tacitly endorse their behavior. Other central banks outside the U.S. have acknowledged this truth, though hesitantly. Notably, some of the Fed’s foreign counterparts are actively exploring or imposing mandatory disclosure rules, tougher climate stress tests of banks’ assets, and direct investment or lending policies that give green enterprises preferential treatment.
Stiroh and Barr must respond pragmatically to the escalating systemic risks posed by climate change. If they don’t, they may even kiss price stability—the one thing Powell’s Fed seems to take seriously, to the point of seemingly disregarding its full-employment mandate—goodbye, as people will be condemned to suffer increasingly from the soaring price of food and other necessities affected by a deteriorating biosphere. Any financial system ultimately rests on the real economy, and if farms are flooded and factories destroyed, everything is going to get more expensive.
