The US Federal Reserve trails other major central banks in tackling climate change, even as President Joe Biden pledges a "whole of government" approach and fights to salvage his ambitious climate agenda as global leaders meet in Glasgow to hash out responses to rising world temperatures.
In recent years the Fed has only begun to look at how changing weather patterns impact its ability to do its job, which includes safeguarding the financial system through bank regulation, and combating economic shocks through monetary policy.
And while it is devoting more effort to studying climate-related impacts, it treats climate risk as just another element that affects the economic and financial landscape, like trade or childcare policy, rather than as anything the Fed might try to shape.
That puts it well behind its peers who are gearing up to buy green assets, crack down on fossil-fuel lending, and push companies toward lower-carbon choices.
The hesitance to prioritize action on climate risk at the world's most powerful central bank will have consequences, analysts and activists say, not just for the US economy but for a global financial system whose largest actors are in New York.
"If [the US] are laggards, it won't be good for our markets, it won't be good for our companies," said Sanjay Patnaik, a Brookings Institution fellow specializing in climate policies. "The US doesn't want to fall behind, or our financial system will be more vulnerable to climate risk."
Fed policymakers could catch up relatively quickly "if they engage fully," he said, particularly by implementing stress tests to gauge banks' vulnerability to climate risks such as higher temperatures or exposure to loans financing fossil fuel.
The Bank of England has already started such testing, with a view to using the results to nudge banks to be better prepared.
Such tests could fall under the Fed's own remit for financial stability and Fed officials have said they will explore the possibility. But, leery of blowback on what is a fraught US political issue, they maintain it's up to Congress, not them, to incentivize businesses to go green.
As Fed Chair Jerome Powell summed it up this summer: "We are not and we don't seek to be climate policymakers as such."
Letting others lead
In the past year, the Bank of England and the European Central Bank have released comprehensive plans to help manage the transition to a greener economy, including using their asset-buying clout to selectively benefit less-polluting companies.
By contrast, the Fed, central bank to the largest greenhouse-gas producing country, remains stuck near the starting gate.
It was the last major central bank to sign up to the Network for Greening the Financial System when it joined in December 2020, and has only just begun an effort to analyze financial-stability risks from climate change, but so far embracing no new policies to address it.
"When I think about why are other banks ahead of us really - and they are - it's because in those governments, they decided some years back that these are critical risks," San Francisco Fed President Mary Daly said recently. Her bank has several economists leading the charge at the Fed on climate-change research.
Others such as the ECB and People's Bank of China have started green bond programs -- purchasing debt to finance environmentally friendly projects -- to nurture a transition toward alternative energy. The Fed views such policies as beyond its economic and financial stability mandates.
Daly acknowledged that as fire seasons lengthen, droughts deepen, and severe weather disrupts more economic activity, the Fed may need to respond more assertively.
"If climate effects occur and they are bridling the growth of our economy and putting us below our potential, then it would be our job to lean against the risks," she said, although she added that's different to mitigating climate risk directly.
The Fed's role is "not to even pull levers that would do that. It's really to be students of it so we are well prepared," Daly said.
Calls for action
Last Friday, activists demonstrated at many of the regional Fed banks and at the Fed Board in Washington, demanding more action and the replacement of Powell with a leader more focused on climate.
Powell awaits Biden's decision on whether to nominate him for a second term, with critics seeing his assertion of climate change as a "longer-term issue" as a black mark against him.
"What we are pushing for is an aggressive level of regulation that we don't think he has the appetite for," said Kathleen Brophy, senior strategist at the Sunrise Project, a youth environmental activist group helping to organize the protests. "They have definitely stepped up on this issue for sure - but it doesn't match the urgency."
Others point out the Fed remains caught between an administration with a much bolder climate change agenda than in the Trump era and a Congress where Republicans and a few Democrats oppose action on climate change.
Even the small steps taken so far have drawn some rebukes.
In a letter to Daly, Republican Senator Pat Toomey called the bank's climate-change research "politically charged" and asked the Fed to abandon what he termed mission creep.
"Such activities are inconsistent with its statutory responsibilities; only Congress has the authority to reform the Federal Reserve or modify its mission," Toomey said.
"I think the Fed can and should be ahead, in the sense of that it's their job to supervise banks," said Paul Fisher, a former policymaker at the Bank of England who coordinated its climate initiatives.
"Climate change is clearly a material threat to the banks and they have to supervise that supervisors ought be getting on with this quietly in the background. Most of the banks recognize it's a financial risk. It shouldn't be that controversial."
And the Fed is forging ahead on its exploratory path. In October it signed on to a report on climate-related financial risk with other US regulators that, for the first time, framed global warming as a financial risk.
"That's the major contribution of the report," Patnaik said. "How do you get people to care about something? You tell them it's a risk to their livelihood and their assets."