The Federal Reserve’s Withdrawal from NGFS

On January 17, 2025, the Federal Reserve Board (FRB) made a surprising announcement—they’re stepping away from the Network for Greening the Financial System (NGFS).

Why Did the FRB Leave?

So, why did the FRB decide to leave the NGFS? According to their statement, the NGFS’s activities have grown beyond what the FRB feels is within their legal boundaries. They believe that the NGFS’s recent focus on policy recommendations and regulatory measures goes beyond what the FRB is authorized to do. Jerome Powell, the Chair of the Federal Reserve, emphasized that while climate risks are important, it’s up to Congress to create policies. The FRB’s job is to keep the U.S. financial system stable and secure.

The Timing—What’s Going On?

As you know, Donald Trump is set to return to the office as the U.S. president on January 20th. This decision by the FRB is happening just before his inauguration. Trump has been known for his skepticism about climate change policies, so some people think the FRB’s move could be a nod to the new administration’s likely stance. Critics are worried this could slow down efforts to include climate risks in financial planning and oversight.

A Split Decision Inside the FRB

Even within the FRB, not everyone was on board with leaving the NGFS. Out of seven board members, five voted to leave, but two members, Michael Barr and Adriana Kugler, chose not to vote. Barr, who has supported stronger climate regulations in the past, might have been unsure about this decision. This shows that even within the FRB, there are different views on how involved they should be in tackling climate risks.

How Are People Reacting?

Internationally, the NGFS expressed disappointment but respected the Federal Reserve Board’s decision. Other central banks and financial regulators are concerned that the U.S. withdrawal could undermine global efforts to address climate-related financial risks. In the U.S., major banks such as Goldman Sachs Group, Wells Fargo, Citigroup, Bank of America, Morgan Stanley, and JPMorgan Chase reportedly decided to exit the NZBA due to rising political pressure under the potential presidency of Donald Trump. This decision reflects the banks’ concerns about the increasing political and regulatory challenges in the U.S. and how these might hinder their ability to meet net-zero targets within the financial sector. Back home, environmental groups and financial experts worry that this could slow the progress the U.S. has been making in tackling these risks.

What Could This Mean for the Future?

The FRB’s departure from the NGFS could have several effects and pose various risks:

1. Reduced U.S. Influence
   The U.S. may lose its ability to shape international standards for managing climate-related financial risks, weakening U.S. financial institutions’ adaptation to global regulations.
2. Fragmented Domestic Regulations
   A patchwork of state or company-specific climate regulations could complicate matters for financial institutions, hindering their ability to keep up with global best practices.
3. Delayed Climate Risk Response
   The U.S. may struggle to address climate risks effectively, with insufficient frameworks for businesses and investors, potentially harming the economy.
4. Erosion of Confidence
   Inadequate climate risk management could erode trust among investors and businesses, particularly those focused on ESG factors, reducing climate-related investments and initiatives.

Without the NGFS’s guidance, U.S. financial institutions might not feel as much pressure to improve their climate risk assessments and disclosures. This could leave them more vulnerable to financial shocks related to climate change, which is something no one wants to see.

What the FRB Has Done So Far

But, what has it done so far? Is this really such a big issue?

Since joining the NGFS in 2020, the FRB has been active in addressing climate-related financial risks. They’ve conducted research on how climate change could affect the economy, focusing on impacts like extreme weather and rising sea levels. One of their key contributions has been in stress testing. This means they’ve helped develop ways to see how well financial institutions can handle potential climate-related risks. These efforts have helped raise awareness about why it’s so important to include climate risks in financial planning. The FRB has also been part of discussions and shared knowledge with other central banks about the best ways to manage climate risks. Their involvement in NGFS working groups and publications has helped push forward the global understanding of how climate change affects financial systems.

Looking Ahead

The FRB’s decision to leave the NGFS is a big change. While they say it’s about sticking to their legal role, many people are worried about what this means for global efforts to deal with climate risks in finance. Their past work with the NGFS shows that there’s a lot of value in working together on these issues, and many are hoping the FRB will find new ways to stay engaged in this important area.

In the end, this decision highlights the crucial role financial institutions play in addressing climate change. However, as climate change continues, it’s essential to tackle this issue even without their support. Therefore, the actions of individuals, companies, organizations, and communities are now more important than ever. We need to cooperate to confront this challenge. Let’s make a difference together. At Carbon Da Capo, we are here to support and assist your efforts through carbon credits.