Is The Federal Reserve’s New Climate Project A Stress Test?

Written By: Michael Kraten, PhD, CPA - https://www.linkedin.com/in/michaelkraten/

One purpose of attending our upcoming INTEGRATE conference is to engage in conversations with thought leaders about: (a) the direction of the economy and (b) how Regenerative CFOs must navigate it. As you know, we have always emphasized this topic in our conference content.

Another purpose of attendance is to obtain information about technical developments in the sustainability sector. One such matter, for instance, is the Federal Reserve Board’s recent announcement of its climate scenario analysis project with America’s “Big Six” global banks.

Scenario analysis? Isn’t that the core component of the capital stress tests that the Fed mandated for banking institutions during the Great Recession? Yes, but those stress tests did not explicitly address “the ability of supervisors and firms to measure and manage climate-related financial risks.” The current project focuses on that issue.

To be sure, the Fed emphasizes that its climate project is an exploratory activity that will not impact the capital requirements of the Big Six. It will not release any individual bank results; it will only share aggregate information.

Nevertheless, the Fed does promise to “publish details of the climate, economic, and financial variables that make up the climate scenario narratives” during the project’s launch in early 2023. Those variables will likely become primary factors in all financial climate risk calculations.

We’ll share information about this project during the INTEGRATE conference. We’ll also provide opportunities for participants, technical experts, and thought leaders to discuss relevant applications. Of course, we’ll continue to provide guidance as we move past the conference and into next year.

In the meantime, let’s remember that the SEC’s proposed climate regulations are not the only important regulatory development on the Regenerative CFO’s agenda. We look forward to discussing all important developments with you when we meet in New York!