This Act mandates the Federal Reserve to develop climate risk scenarios and implement enhanced, biennial stress tests and exploratory surveys for large financial institutions to manage physical and transition risks posed by climate change.
Brian Schatz
Senator
HI
The Climate Change Financial Risk Act of 2025 mandates that the Federal Reserve develop tools to assess and manage the growing physical and transition risks that climate change poses to the stability of the U.S. financial system. The bill establishes a technical advisory group to help create distinct climate risk scenarios (e.g., 1.5°C and 2°C warming) for use in mandatory biennial stress tests for large financial institutions. Following these tests, major firms must submit detailed climate risk resolution plans, which regulators can reject, potentially restricting capital distributions if the plans are inadequate.
New Act Forces Big Banks to Stress Test for Climate Shocks: No Bailouts for Bad Weather Planning
The Climate Change Financial Risk Act of 2025 is the Federal Reserve’s new mandate to start treating climate change like the financial risk it is. This bill forces the biggest financial institutions—think bank holding companies and nonbank financial giants with over $250 billion in assets—to prove they can survive major economic chaos caused by global warming. Essentially, the Fed is saying, “We see the $2.9 trillion in weather-related damage since 1980, and we are not going to let a climate disaster take down the economy.”
The New Rule: Climate Stress Tests Are Coming
Right now, the Fed runs stress tests to see if banks can handle a recession. This bill adds a new, mandatory biennial test specifically for climate risk (SEC. 6). The Fed must create three specific warming scenarios: a best-case 1.5°C warming, a worse-case 2°C warming, and a third scenario based on current policies already in place (SEC. 5). These scenarios must factor in everything from supply chain disruptions and food security impacts to mass migration and international conflicts, making them far broader than standard financial tests.
The good news is that the first three rounds of these tests are just for practice—no penalties, just public summaries of the findings. But after that, the gloves come off. If a "Covered entity" fails to show it can maintain its minimum capital reserves under a severe climate scenario, it must submit a "climate risk resolution plan." If the Fed rejects that plan—maybe because it’s not "reasonable or appropriate" or doesn’t seem "fair to vulnerable communities"—the company is generally barred from making capital distributions, meaning no more stock buybacks or dividends until they fix their balance sheet (SEC. 6).
Who’s Paying the Price?
This legislation directly impacts the largest financial players (over $250 billion in assets) and a second tier of firms ($100 billion and up) that the Fed can designate as "Covered entities" if they pose a risk to stability (SEC. 3). For these massive corporations, this means significant new compliance costs and potentially restricted payouts to shareholders. It forces them to aggressively manage their exposure to both physical risks (like loans secured by coastal property that will flood) and transition risks (like investments in fossil fuel companies that will be devalued as the world moves to green energy).
This transition risk part is key. If you work in an energy-intensive industry, your company’s access to capital could get harder and more expensive because the bank is now required to worry about the value of your assets becoming "stranded" (worthless) due to new policies or technology (SEC. 3). The burden here is squarely on the largest banks to stop funding the parts of the economy that are most vulnerable to climate change.
The Advisory Group and the Fine Print
To make sure the scenarios are based on solid ground, the bill creates a 10-person Climate Risk Scenario Technical Development Group made up of five top climate scientists and five financial economists (SEC. 4). This group will advise the Fed on how to build and update the scenarios. Here’s a detail that matters: the members of this group serve without compensation, and the group is explicitly exempt from the standard federal advisory committee oversight rules (SEC. 4). While this might streamline the process, it reduces the public transparency around the foundational science that will dictate billions of dollars in financial regulation.
Finally, the bill requires a broader Sub-systemic exploratory survey for smaller banks and financial companies (over $10 billion in assets) to understand their climate exposure. While the results of these surveys will be aggregated and reported publicly, the Fed is strictly prohibited from naming any individual company in the public reports (SEC. 7). This provides a necessary layer of privacy for smaller institutions while still giving regulators a comprehensive look at the overall system’s vulnerability.