New Fed Rules Force Banks to Stress Test Against 1.5°C Warming: Dividends on the Line

The Climate Change Financial Risk Act of 2025 is essentially a massive upgrade to how the Federal Reserve (the Fed) handles systemic risk, making climate change a mandatory part of the financial safety checklist. This isn't about saving the planet; it’s about protecting the economy from the financial fallout of extreme weather and the global shift away from fossil fuels. It mandates that the biggest financial players—banks and nonbank financial companies with at least $250 billion in assets—must now prove they can survive a climate disaster.

The Fed’s New Crystal Ball: Three Scenarios

To make sure everyone is testing against the same reality, the bill requires the Fed to develop three standardized climate risk scenarios within one year. Think of these as the official yardsticks. They must include a 1.5°C warming scenario, a 2.0°C warming scenario, and a scenario based on the temperature increase likely under current, already-implemented policies (SEC. 5). The goal is to force institutions to account for both physical risks (like hurricanes destroying assets or droughts crippling agriculture) and transition risks (like investments in fossil fuels suddenly becoming worthless because of new regulations or green technology shifts).

To keep these scenarios grounded in reality, the bill creates a Climate Risk Scenario Technical Development Group (SEC. 4). This advisory panel must be made up of five climate scientists and five economists who understand the financial system. They will advise the Fed, ensuring the scenarios use the best available science. This is the government bringing the climate science lab directly into the financial regulation office.

The Mandatory Climate Stress Test: What’s at Stake?

For the biggest banks (the “covered entities”), this means mandatory biennial climate stress tests (SEC. 6). Every two years, they have to run their entire business model through these adverse climate scenarios to see if they have enough capital to survive. For the first three cycles, these tests are just practice—no penalties. But after that, the results get serious.

Crucially, the bill requires these firms to submit a climate risk resolution plan based on the stress test findings. This plan details how they’ll adjust their assets and liabilities to fix any weaknesses the test uncovered. If the Fed objects to this plan—say, because it’s not sound, or because the Board decides it “fails to provide fair services to vulnerable communities”—the consequences are immediate and harsh. The bank is generally barred from making any capital distribution, which means no paying dividends and no buying back stock (SEC. 6). For shareholders, this is a direct threat to their returns, tying corporate payouts directly to climate planning compliance.

The Check-Up for Mid-Sized Players

What about the institutions that are too small for the full stress test but still big enough to matter? The bill also creates a Sub-systemic Exploratory Survey for “surveyed entities”—institutions with assets between $10 billion and $250 billion (SEC. 7). This survey aims to identify institutions heavily exposed to climate-vulnerable areas or industries, like banks with lots of mortgages in flood zones or loans to energy-intensive sectors. They have to tell the Fed how they plan to adapt their business models.

The Fed must then release a public report summarizing the findings and analyzing whether the companies’ plans are actually plausible. While the Fed can’t name specific institutions in the public report, this process ensures that even mid-level players are transparent about their climate risk exposure, forcing them to internalize the costs of climate change adaptation.

The Power Shift: New Regulatory Reach

This legislation gives the Fed significant new authority. By linking climate planning to the ability to pay dividends and execute buybacks, the Fed gains a powerful lever over corporate governance and capital allocation. While the intent is to protect the financial system from climate shocks—a benefit for everyone—the subjective nature of some of the rejection criteria, such as whether a plan adequately serves “vulnerable communities,” introduces a new layer of regulatory discretion that goes beyond traditional financial safety and soundness. This move signals a clear shift: climate risk is no longer just an environmental issue; it’s now a core regulatory requirement for doing business in the financial sector.