kevin stiroh : climate change and risk management in bank supervision remarks by mr kevin stiroh, executive vice president of the financial institution supervision group of the federal reserve bank of new york, at the conference on “ risks, opportunities, and investment in the era of climate change ”, harvard business school, boston, massachusetts, 4 march 2020. * * * as prepared for delivery introduction good afternoon and thank you for the opportunity to participate in this conference on “ risks, opportunities, and investments in the era of climate change, ” a topic of critical importance for all of us. climate change is already affecting economic and financial outcomes, and projections point to increasingly severe and unpredictable change. 1 in recent years, we ’ ve seen a growing focus of central banks on the financial risks related to climate change. some may argue that this shift was slow in coming, but the change is striking nevertheless. beginning with bank of england governor mark carney ’ s speech in 20152, climate change has emerged as a key issue globally. within the federal reserve, governor brainard detailed how climate change impacts the fed ’ s core objectives around monetary policy, financial stability, financial regulation and supervision, community and consumer affairs, and payments and describes efforts to build capacity to assess these risks. 3 today, i ’ m going to take a more narrow perspective and talk about climate change from the perspective of risk management. i ’ ll discuss how the development of new risks associated with climate change is beginning to change the practice of risk management at financial institutions in terms of governance, risk identification and management, scenario analysis and transparency. i ’ ll also say a few words on why i believe it is appropriate, even critical, for supervisors to focus on this particular risk. before proceeding, i will emphasize that i am speaking for myself and my views do not necessarily reflect those of the federal reserve bank of new york or the federal reserve system. climate change and risk management the discussion of climate change and risk management has introduced a new lexicon for risk discussions. physical risk is the potential for losses as climate - related changes disrupt business operations, destroy capital and interrupt economic activity. transition risk is the potential for loss resulting from a shift toward a lower - carbon economy as policy, consumer sentiment and technological innovations impact the value of certain assets and liabilities. these effects will be felt across business sectors and asset classes, on strategies and operations, and through the balance sheets and income statements of financial firms. at a practical level, risk managers at financial institutions

for supervisors related to time horizon, data limitations, and inherent complexity. 7 one question that gets particular attention centers on time horizon and prioritization. more specifically, given the many risks that financial firms face — cybersecurity, geopolitical uncertainty, and the credit cycle to name a few — and the relatively long time horizon around climate change, why should supervisors focus on this particular risk? i think that is a fair question and there are good answers. first, we are already observing the impacts of climate change on financial firms. evidence continues to grow that climate change is affecting economic and financial outcomes. 8 moreover, evidence from climate science suggests that some further physical climate impacts are lockedin due to past emissions. 9 some investors consider an assessment of sustainability to be integral to their fiduciary responsibilities. 10 and, as i described earlier, supervised firms are choosing to build capacity in this areas, so supervisors need to understand and assess these changes. this is a risk management question for today with direct implications for safety and soundness. second, given the complexity of the problem, we all need time to build data, models, and intellectual capacity to address risks as they arise in the future. it took the better part of a decade to approach a steady - state in central bank stress testing capabilities for more familiar and arguably less complex risks like credit card losses or shocks to asset values from interest rate spikes. the economics of climate change are more complex with feedback effects, nonlinearities and massive uncertainty that will require substantial investments to understand. 11 third, financial markets and institutions face the potential for a “ minsky moment ” related to climate change — an abrupt repricing of assets in response to a catastrophic event or change in investor perceptions. 12 financial firms and supervisors need to consider the potential and impact of this type of sudden event. conclusion in closing, the impact of climate change on the structure and performance of the economy and the financial sector is happening now and will continue. conferences like this certainly help to further our awareness and understanding of this critical issue. i am confident that risk managers and central banks will continue to invest and build capacity to understand and mitigate these risks in order to make the financial sector more resilient. i look forward to hearing the insights from across the financial sector in the remainder of this conference. thank you for your attention. 3 / 4 bis central bankers'speeches 1 u. s. global change research program, “ fourth national climate assessment : volume ii : impacts