Some of the world’s largest central banks are joining the fight against climate change. Though melting glaciers may be a huge leap from monetary policy, policy makers say they must respond to threats that have the potential to disrupt the global economy. Some critics say climate policy is better left to politicians, however, particularly in countries where central banks are hemmed in by explicit government mandates. The US Federal Reserve remains a notable holdout.
1. What got central banks interested?
A mounting body of research suggests that climate change poses a threat to price stability and a risk to the financial system, two traditional purviews of central banks. Even if goals set in the 2015 Paris Agreement to limit global temperature gains are met, the fallout could include lower output on farms and construction sites, increased migration and more deaths from heat and other climate factors. That’s on top of property damage from extreme weather and coastal flooding that could total trillions of dollars by 2100. In addition, activists stage protests regularly outside central bank buildings and gatherings.
2. What can monetary policy do?
Central banks can impose mandatory climate-risk disclosure rules, conduct stress tests of banks’ assets for climate-related risks and make it more expensive for banks to lend to companies at high risk. In purchasing bonds and other debt securities, central banks also can limit their exposure to industries with high greenhouse-gas emissions.
3. Who is doing what?
• The Bank of Japan is looking to spur private-sector efforts by providing funds for bank lending to climate-friendly businesses. Some 63 financial institutions were eligible as of early 2023, with ¥3.6 trillion ($27 billion) in total outstanding loans disbursed.
• The People’s Bank of China provides direct investment in sustainable projects, encourages the sale of green bonds and is studying policy tools to provide cheaper funding to institutions supporting emission-cutting projects. It’s also planning to beef up financial regulation and conduct stress tests tied to climate risks.
• Policy makers at the Bank of England have signaled they’ll take account of the government’s environmental goals in buying assets in financial markets. In their first-ever stress test to assess how the financial services industry will cope with the transition, they found that UK banks and insurers face climate-related losses of as much as £334 billion ($405 billion) over the next three decades, depending on how quickly the economy is shifted toward net zero emissions.
• The European Central Bank adjusted its collateral policies and started tweaking its corporate-bond portfolio to favor issuers that pollute less. Initial efforts focused on the reinvestment of maturing debt, but Isabel Schnabel, one of the institution’s most influential policymakers, suggested that the ECB could also consider offloading assets issued by big greenhouse-gas emitters. She also highlighted green-lending operations as a potential future tool. Separately, the ECB said banks have until the end of 2023 to reflect climate risks in their governance, strategy and risk management.
• Sweden’s Riksbank cleansed its reserves of assets tied to pollution and started mapping the carbon footprint of its corporate bond-purchase program. It also promised to conduct asset purchases and manage foreign-exchange reserves with sustainability in mind.
4. What’s the view in the US?
Fed Chair Jerome Powell has faced competing political pressures over the extent to which the Fed focuses on climate change. In 2021, some Democratic lawmakers and left-leaning groups opposed his candidacy for a second term, saying he wasn’t doing enough to combat global warming. But when the Fed does turn its focus to financial risks presented by climate change, it attracts criticism from Republican lawmakers. At an international conference in January, Powell sought to draw a line around how far the central bank will use its powers to promote a greener economy, vowing it will not be a climate regulator. Barring explicit orders from Congress, he said, “it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.”
5. How is the financial system vulnerable to climate change?
In 2015, Mark Carney, who was then governor of the Bank of England, raised alarm about sudden changes in pricing due to environmental changes. Such changes could take the form of physical damage that destroys the value of assets (such as waterfront properties), the imposition of new liabilities on companies (as shown by California utility giant PG&E Corp.’s wildfire-driven bankruptcy) or sharp increases in insurance prices. Another risk is a sudden change in the value of certain holdings because of drastic government action, like the introduction of a steep carbon tax or regulations that keep fossil fuels in the ground, leaving them as so-called stranded assets.
6. What’s in the works?
The Riksbank will host a conference on “Climate change and the financial system: Challenges and opportunities for central banks” in May. The Swedes are part of a group of central banks and related organizations set up in 2017 by the BOE and a few others to swap research and potential policy solutions. The idea is to influence decisions by making measurable progress toward climate goals part of the fiduciary duty of lenders, investment banks and asset managers. At the United Nations COP26 climate summit in Glasgow, Scotland, in 2021, Carney announced that banks and asset managers representing 40% of the world’s financial assets had pledged to decarbonize their operations by 2050 and also set more immediate goals for 2030. Some 550 firms, which represent a pool of roughly $150 trillion of assets, have signed up for the so-called Glasgow Financial Alliance for Net Zero. GFANZ is co-chaired by Carney and Michael R. Bloomberg, the owner and founder of Bloomberg News parent Bloomberg LP.
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