U.S. Sen. Brian Schatz (D-Hawaii) and U.S. Rep. Sean Casten (D-Illinois) recently came together to introduce legislation that would work towards increasing the resiliency of financial institutions against climate-related financial risks, according to Schatz's website.
The Climate Change Financial Risk Act of 2021 would require the Federal Reserve (the "Fed") to establish an advisory group of climate scientists and climate economists to develop climate change scenarios and conduct stress tests to measure the resilience of large financial institutions to potential climate-related financial risks.
"Climate change is impacting every sector of our economy. And right now, our financial institutions aren’t prepared for the losses and disruption they may face," Schatz wrote in a May 27 Facebook post. "That’s why I authored legislation that will direct the Federal Reserve to measure our financial institutions’ exposure to climate-related risks and improve our financial system’s resilience to a potential climate-driven financial crisis. Time isn’t on our side. We need to start treating climate risks with the seriousness and urgency they demand."
The Fed will use the scenarios to conduct stress tests every two years to measure how potential climate-related physical and transition risks could impact the global economy and business operations. Tests will be conducted on firms with more than $250 billion in total consolidated assets and some firms with assets over $100 billion, as the Fed deems necessary to promote financial stability.
“Climate change poses a grave and imminent threat to the stability of our financial system," Casten said, according to Schatz's website. "Our bill will move us forward toward safeguarding our financial system — from direct losses caused by droughts, wildfires and sea-level rise to market volatility and erosion of investor confidence.”
Companion legislation to the bill has been introduced by the U.S. House of Representatives.