While the Fed has been slow to act, other central banks around the world are already working to decarbonize their financial sectors. The Bank of Japan, Bank of England, and others have taken preliminary steps to enhance financial stability against climate disruption, and to restructure markets to drive greater investment into building the growing clean economy. They’ve done this by incorporating tools like stress tests and transitional incentives, which can help ensure our financial system is ready to weather climate-related shocks. As Fed Board of Governors member and current Vice Chair nominee Lael Brainard put it recently, “the U.S. has been behind and we need to catch up.”

And we can’t afford to fall behind in addressing this threat. Damage is already being done, and the costs are growing. In 2020, climate disasters cost the United States $95 billion, nearly double the losses of the year before. And last year, Hurricane Ida caused two property insurers to go under. Worsening extreme weather events driven by climate change are already demolishing investments, disrupting supply chains, causing price movements and inflation, interrupting business, and abruptly altering the value of certain assets—and threatening to destabilize our entire financial system, and our entire economy, if regulators fail to act.

We don’t need to look far back in history to see how devastating regulatory negligence towards emerging financial risks can be. In the years leading up to the Great Recession of 2008, regulators were asleep at the wheel and millions of Americans lost their life savings when investments in risky subprime mortgages crashed the economy. Today, those same banks are adding fuel to the fire of the climate crisis and exacerbating climate financial risk by investing trillions in risky fossil fuel assets. If warming continues along its current trajectory, economic losses are projected to reach $23 trillion by 2100, several times the cost of the 2008 recession. Wall Street won’t regulate itself—the Fed must take action.

To fulfill its mandate to address emerging risks and protect the stability of the financial system, the Fed must use every tool at its disposal to mitigate climate-related financial risks. That should include steps to increase transparency and preparedness, like mandatory disclosure rules and stress testing financial institutions for worst-case climate scenarios. But those steps alone will not be enough. To meet this moment, Powell must also be prepared to confront Wall Street’s reckless investments in the toxic fossil fuel assets that are driving this systemic threat to our financial system. Simply disclosing risk will not be enough to protect the economy if we fail to address the root cause of the threat.

Before he was nominated for a second term, Chairman Powell committed to make climate a top priority. In Tuesday’s hearing, we’ll see if he’s serious about that commitment. Americans are already grappling with climate related financial hardships like homes and businesses being destroyed in storms or wildfires, increased insurance premiums, and more. There’s no question that the climate crisis will play an important role in America’s financial future—what remains to be seen is if the Fed will step up to meet the moment, or sit back and let Wall Street drag our economy into climate chaos.

Looking for a deeper dive? Download our full memo on the five critical steps the Fed must take to protect our financial stability and confront Wall Street’s climate-risky behavior.