The Federal Reserve has published the results of its pilot climate scenario analysis exercise, providing a summary of how six of the largest banking organisations in the United States are assessing and managing the financial risks associated with climate change. The publication was released on 9 May 2024.

The exercise examined how the participating banks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, whose results were published only in aggregate — approach both physical risks, such as property damage and disruption caused by extreme weather events, and transition risks arising from the economy's shift towards lower-carbon energy sources and production methods. The Fed was explicit that the pilot was an exploratory exercise designed to build analytical understanding rather than a stress test, and that no prescriptive capital requirements would flow directly from the results.

FINDINGS

The published findings showed that the six institutions took a wide range of approaches to estimating climate-related financial risks and faced significant data and modelling challenges. Participants reported a lack of comprehensive and consistent data, for example on building characteristics, insurance coverage and counterparties' climate plans, and difficulty in obtaining the granular, forward-looking emissions data and physical asset exposure information necessary to model climate risks with confidence.

The summary noted that participants plan to continue investing in data, models and expertise, and that many relied on external vendors to fill data and modelling gaps. The Fed said differences in approach were driven largely by participants' business models, views on risk, access to data and prior participation in climate exercises abroad; the exercise itself covered residential and commercial real estate loans for physical risk and corporate and commercial real estate loans for transition risk.

SUPERVISORY CONTEXT

Regulators in the United Kingdom, the European Union, Australia, and Canada have already conducted comparable exercises. The Fed has consistently emphasised that its approach is about identifying and understanding risk rather than mandating specific climate-related capital allocations or prescribing transition strategies for individual firms.