The US’s largest lenders have shown “significant data and modelling challenges” in their assessment of financial risk related to climate change in a recent exercise conducted by the Federal Reserve.
The findings expose what critics describe as significant deficiencies in lenders’ business models, bringing into question their resilience in the face of accelerating climate change.
The Federal Reserve last week published the results of its latest pilot climate scenario exercise, involving Bank of America, Goldman Sachs, JPMorgan, Morgan Stanley, Wells Fargo and Citigroup.
The exercise highlighted a variety of challenges for the banks, including “a lack of clear and consistent data related to building characteristics, insurance coverage and counterparties’ plans to manage climate-related risks,” according to the Fed, with participants often relying on third-party data to fill data and modelling gaps.
The results of the exercise reveal “deep and broad deficiencies in banks’ risk management protocols”, according to Dennis Kelleher, co-founder, president and CEO of pressure group Better Markets.
“The pilot results show that the banks tested had significant data and modelling challenges when attempting to simply estimate their climate risk for an ‘exploratory’ test,” said Kelleher in a statement, adding that the data is “extremely troubling”.
The findings come as US and international financial institutions are coming under increased scrutiny related to their financing of fossil fuel industries. In the 2024 Banking and Climate Chaos report published by Rainforest Action Network and other non-profits, JPMorgan, one of the banks listed in the exercise, was named the biggest fossil fuel industry financier in 2023.
According to the BOCC report, last year, JPMorgan helped carry out investments by fossil fuel-linked companies worth $40.8bn, a slight increase from the $38.7bn it committed in 2022.
Better Markets urged the Fed to require the six banks to immediately address the risk management weakness revealed in the test results and expand the climate scenario analysis to include all of the large banks that are part of the annual supervisory stress test.
The Fed’s exercise looked at the way banks respond to climate-related challenges, testing reactions to possible “forward-looking risk scenarios”, including climate, economic and financial factors.
The central bank chose the scenarios to represent a “range of plausible future outcomes” that could help banks manage these impending risks.
The Federal Reserve described the exercise as “exploratory in nature” and not bearing any consequences for the banks, and announced plans to use the information collected from the exercise to further engage with banks and test their ability to assess and deal with financial hazards related to climate change.
