The Federal Reserve recognized climate change as a key risk to U.S. financial stability in a report released Monday.
The semiannual Financial Stability Report also recognized ongoing concerns over COVID-19, saying that "investor risk appetite and asset prices have increased in recent months but could suffer significant declines should the pandemic take an unexpected course or the economic recovery prove less sustainable."
Federal Reserve Governor Lael Brainard welcomed the addition of climate to the financial stability report. "A lack of clarity about true exposures to specific climate risks for real and financial assets, coupled with differing assessments about the sizes and timing of these risks, can create vulnerabilities to abrupt repricing events," she said in a statement.
Ms. Brainard, who is considered a candidate for Treasury secretary in the Biden administration, said chronic hazards like rising temperatures or sea levels "or a gradual change in investor sentiment about those risks, introduce the possibility of abrupt tipping points or significant swings in sentiment."
Ms. Brainard acknowledged the risks financial markets have in pricing climate risks and said improved measurement and more standardized disclosures will be crucial.
"It is vitally important to move from the recognition that climate change poses significant financial stability risks to the stage where the quantitative implications of those risks are appropriately assessed and addressed," she said.
Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, called the report's mention of climate risk "a dramatic step toward tackling climate change as a systemic financial risk," and commended Fed officials "for their clear-eyed willingness to affirm" their responsibility to protect markets from the threat.
"There is a new age dawning in the fight against climate change, and we are hopeful that it will include robust financial regulation," Mr. Rothstein said in an emailed statement.