The U.S. Federal Reserve Board issued its Financial Stability Report and--for the first time--identified climate change among the risks to the resilience of the U.S. financial system. Among other things, the Report focuses on how important it is to have clear and reliable information to price risk of climate change into vulnerable assets. Monday's report comes on the heels of former Vice President Joe Biden winning the U.S. presidential election. Now President-Elect Biden has pledged to address climate change by making it a priority of his administration, in contrast to the approach under President Trump. One thing is clear: the Federal Reserve is focused on the implications of climate change for markets and expects "banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks."
Within the financial system, increased transparency through improved measurement and disclosure could improve the pricing of climate risks, such as an increase in the frequency and severity of extreme weather events, thereby reducing the probability of sudden changes in asset prices. Continued research into the interconnections between the climate, the economy, and the financial sector could strengthen knowledge of transmission, clarify linkages and exposures, and facilitate more efficient pricing of risk.