The US Federal Reserve has joined a consortium of central bankers in support of the Paris climate goals as the risk of climate change on the global economy becomes more apparent.
The move came when the Network for the Greening of the Financial System (NGFS), which includes 75 central banks, published a survey on its members’ plans to combat climate change. The Fed is one of eight new members joining the group this month, following a pledge by US President-elect Joe Biden to re-join the Paris Climate Agreement, which is a requirement.
“As we develop our understanding of how best to assess the impact of climate change on the financial system, we look forward to continuing and deepening our discussions with our NGFS colleagues from around the world,” said Jay Powell, chairman of the Fed.
According to the survey, only a small minority of central banks have discussed implementing operational changes to combat climate change, despite believing in the effects on economies.
One of the most controversial areas of monetary policy is whether central banks should use their extensive bond-buying programs to fight climate change by selling the bonds of the heaviest carbon emitters and buying more green bonds.
Only seven respondents to the NGFS survey stated that they “are not currently considering any climate-related measures”. Most proponents of measures said they aim to “mitigate financial risks arising from exposure to climate-related risks on their balance sheets”.
When asked whether they considered taking action to protect against climate risks or proactively support the transition to a low-carbon economy, more than half said they hadn’t. The main obstacle to potential action identified by most respondents was “the risk of financial bias”.
Clemens Fuest, head of the Ifo Institute in Munich, said it was “a very bad economic policy to use this as a basis for managing the flow of capital in an economy,” adding that it is equivalent to a “centrally planned economy” .
Most of the central banks polled by the NGFS said there needed to be better climate risk disclosure by commercial lenders and bond issuers, as well as greater international coordination, before they could take action in this area.
“The vast majority of the central banks participating in our survey see scope for adapting their operating framework to climate-relevant risks,” said Sabine Mauderer, a Bundesbank executive who oversaw the NGFS survey. “Although central banks are clearly sensitive to climate risk, the implementation of specific measures is still at an early stage.”
The President of the European Central Bank, Christine Lagarde, has promised to make the fight against climate change an important part of her strategy review, which is due to be completed next year.
Environmental activists have accused the ECB of biasing the market in favor of heavy carbon emitters like oil and gas companies, utilities and airlines, as these sectors issue more bonds than most others.
Ms. Lagarde said central bankers should “wonder” whether they are “taking undue risk” by trusting investors to assess environmental issues. She said the ECB would consider abandoning the principle of “market neutrality,” which means it will always buy bonds in proportion to the overall market.
However, this was rejected by Jens Weidmann, head of the German central bank and member of the Governing Council of the ECB, who wrote in the Financial Times last month that “it is not up to us to correct market distortions and political measures or omissions”.
Mr Weidmann added that the ECB “should only consider buying securities or accepting them as collateral for monetary policy purposes if their issuers meet certain climate-related reporting requirements” and should only use ratings that include climate risks.