Lenders and investors are beginning to identify climate change impact as an emerging risk that has the potential to profoundly impact not only their physical assets, but also entire financial systems due to climate change related events. Climate change can result in “direct financial risks, prompting a reassessment of asset values, changing the cost or availability of credit, or affecting the timing or reliability of cash flows,” as noted in “Climate Change and Financial Stability”, published by the Federal Reserve Board of Governors in March 2021. Just last week, Chairman Jerome Powell suggested that the Fed will probably require banks to conduct stress testing for climate vulnerability at some point in the future.
In this Globe St. blog, Kathryn Peacock and Partner Energy’s Tony Liou discuss identifying asset-level climate risks, standardizing the process, and what lenders will do with climate risk information.