Bloomberg is reporting this week that the world’s largest central banks are getting louder about climate change risks and “some of them are even starting to do something about it.”
This new focus has raised questions over whether the banks are muddying their mission--and whether their tools will even work in this field. Critics say they can and should go a lot further.
Bloomberg says that a growing body of research suggests that climate change poses the greatest long-run threat to the global economy – including inflation and financial stability, which central banks oversee.
Even if the ambitious goal set in the 2015 Paris Agreement of limiting global temperature gains to 2 degrees Celsius above pre-industrial levels is met, the world’s economies are likely to be affected in important ways, from lower productivity on farms and construction sites to increased mortality and migration. That’s in addition to damage from more extreme weather events and coastal flooding. Then there are risks to the financial system.
In 2015, outgoing Bank of England governor Mark Carney raised an alarm about the “tragedy” of climate change and warned specifically about “re-pricing” events. That includes physical damage that destroys the value of assets (such as waterfront hotels), imposes new liabilities on companies such as California’s now bankrupt PG&E – or sharply raises insurance prices.
Another risk could be a sudden slump in the value of certain assets because of drastic government action to combat change, like the introduction of a steep carbon tax or regulations that keeps fossil fuels in the ground.
Two years later, Carney and several peers created the Network for Greening the Financial System, a group that’s grown to about 50 central banks and related groups that swap research and potential policy solutions.
In 2019, the group created a set of guidelines that urge peers to price in climate change risk when regulating financial companies and to invest with sustainability goals in mind for their own portfolios. To many, the mere fact that central banks are talking about the challenge is of huge significance.
Each of the major banks has its own approach, depending on their legal mandate and their government’s priorities, Bloomberg notes. It describes a few examples, including the People’s Bank of China that provides direct investment in sustainable projects, encourages issuance of green bonds – and even curbs loans to polluters. Also, the Bank of Canada announced a research program on climate change at the end of 2019 and the Bank of England is in the midst of stress testing insurers and banks for how well they’d handle climate events and potential new regulation.
The U.S. Federal Reserve hosted a climate change conference in November and is conducting research on the subject and the European Central Bank is set to consider climate change in its monetary policy review and Christine Lagarde, president of the EU bank, has pledged to make climate change a “mission critical” issue. Her remarks spurred discussion in financial circles of the potential for “Green QE,” or the purchase of bonds to nudge down long-term interest rates in an effort to funnel some of a central bank’s bond-buying toward green projects and companies, lowering borrowing costs for that industry.
Central banks also can play a role through regulation and research, and can use their regulatory powers to do things like force banks to calculate and disclose their climate-related risks and can include climate-repricing scenarios in the stress tests they require to make sure banks are prepared for losses. That could have the effect of damping banks’ appetite for fossil-fuel investments or lending, and spur alternative energies.
Still, Bloomberg notes that central banks also have very limited lawmaking capability and are generally “supposed to be independent,” and so typically avoid throwing their weight behind political agendas – especially when they contradict the priorities of the elected government.
It also says that two of the world’s 10 largest economies are missing from the Network for Greening the Financial System: Brazil and the U.S., although Fed Chairman Jerome Powell said that it’s been sending representatives to meetings and will “probably” join at some point.
However, Bloomberg says that critics argue that the issue “isn’t one for central banks,” which can only impact economies indirectly and should be left to politicians who can spend and invest directly.
There’s also a risk that, because some see climate change as controversial, a central bank’s entry into the area will open the door for more political influence. Finally, there’s an argument that because the time horizon for monetary policy is about 2-3 years, and climate change timelines are much longer, it makes central banks ill-equipped to have a meaningful impact.
So, we will see. Central banks with their large economic presence likely will be forced to take at least some steps to help their clients deal with climate uncertainty, and these likely will be highly controversial since most of their efforts are already in the cross hairs of skeptics. These issues are highly important for producers and should be watched closely as they emerge, Washington Insider believes.
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