By Simon Clark
Central banks, the most powerful financial institutions in the
world, want to become the guardians of the environment as well.
The central banks say climate change is a financial and economic
risk. They believe rising sea levels, more wildfires and bigger
storms could cause shortages that spur inflation, the regulators'
The banks that are deepest into the issue are trying to limit
climate change by steering their financial systems away from fossil
fuels. Their regulations could hit U.S. companies operating
overseas. The Bank of England's remit now explicitly includes
environmental sustainability as well as maintaining price
The Federal Reserve is proceeding cautiously, worried about
financial risks but wary of expanding its mandate, which would put
it in the middle of the partisan debate over climate change.
In December, the Fed joined the Central Banks and Supervisors
Network for Greening the Financial System. That group, which
includes central banks and regulators of major European countries
as well as China, Russia and Japan, started with eight members in
Now, with 90 central banks and regulators as members, the group
is planning to meet at a major conference next month. Some members
are adjusting policy based on climate considerations, potentially
including higher capital charges for lending to fossil-fuel
companies and bank stress tests that focus on the risk of rising
temperatures to loan portfolios.
The group, which was launched in part as a response to the U.S.
announcing in 2017 that it was pulling out of the Paris climate
accords, includes regulators of all the world's globally systemic
banks. The central banks' rising interest in climate dovetails with
a flood of investor cash into products such as green bonds and into
stocks of companies that make batteries and produce alternative
energy. The U.S. has since rejoined the Paris accords.
Potential risks posed to the financial system by climate change
include losses on loans or a decline in the value of assets, such
as waterfront property and property repeatedly exposed to
wildfires. Commercial banks and investors lend billions to
companies that produce significant amounts of carbon dioxide, such
as operators of coal power plants.
While climate change could affect macro economies, the effort
right now is largely focused on regulating financial companies.
Still, it takes the central banks beyond their traditional focus of
In March, the group proposed options to adapt monetary policy
"to a hotter world" including central banks' charging higher
interest rates to lenders that pledge carbon-intensive assets as
collateral. These might include corporate bonds backed by a
coal-fired power plant, for example.
Some central banks are also debating whether to require banks to
set aside more capital for loans to fossil-fuel companies and less
capital on loans to wind- or solar-power companies.
Such a move would mean central banks would be influencing which
parts of the economy get credit. Shifting in that direction would
go against the long-held belief by central banks that they should
avoid influencing lending decisions and could embroil them in
political disputes over the extent of climate change.
Some central banks are moving more quickly than others, setting
rules that U.S. companies will have to follow in affected countries
and creating possible examples for the Fed and others.
In the U.K., Treasury chief Rishi Sunak this year changed the
remit of the Bank of England's interest-rate-setting committee to
include "strong, sustainable and balanced growth that is also
environmentally sustainable" as well as maintaining price
The Bank of England has added climate risks such as rising
temperatures and sea levels to its bank stress tests. In the past,
stress tests mostly measured whether banks could withstand
hypothetical economic scenarios such as big recessions or financial
The U.K. institution last year began disclosing emissions from
its physical activities, such as producing bank notes, the carbon
footprint of its buildings and business travel. Regulators,
including in the U.S., are increasingly focusing on improving
corporate disclosure of carbon emissions and climate risks.
The Bank of France has started tallying the potential costs of
climate change. A pilot climate stress test of banks and insurers
found that the cost of insurance claims could rise as much as six
times in parts of France by 2050 because of the increasing risk of
droughts and flooding.
The European Central Bank, which oversees monetary policy and
bank regulation in the eurozone, says climate already is covered by
"Climate change can directly affect inflation. This may happen
when more frequent floods or droughts destroy crops and raise food
prices, for example," wrote Frank Elderson, a member of the ECB's
executive board and the chairman of the central banks' climate
group. "These issues clearly lie at the heart of our mandate."
The Bank for International Settlements, known as the central
bank for central banks, has a program to finance renewable energy
production. The ECB is helping to fund that program.
Fed Chairman Jerome Powell plans to participate in the June
online meeting of the central banks' climate group. The Fed's
membership doesn't oblige it to adopt any policies, and Mr. Powell
has stayed away from the plans proposed by other banks.
Some are concerned that Mr. Powell and other central bankers are
overstepping their mandates.
Rep. Frank Lucas (R., Okla.) asked Mr. Powell in March what he
should tell constituents concerned about the Fed's "moving towards
regulation and supervision with environmental policy objectives,
potentially discouraging banks from doing business with entire
sectors of the economy."
"We don't tell banks what legal businesses they can lend to,"
Mr. Powell replied. "We're at a very early stage of understanding
the risks to regulated financial institutions from climate change.
It is a risk that we think the public has every right to expect
that we will assure that the banks do manage over time."
The central-bank group says regulators who don't consider
climate risks are failing in their jobs. "If you have a financial
stability mandate and you are not looking at climate then you are
not fulfilling your mandate properly," said Morgan Després, head of
the secretariat of the Network for Greening the Financial System at
the Bank of France in Paris.
Focusing on climate change forces the banks to go beyond the
models they have long relied on for regulating lending and markets.
At the Fed, the climate effort is being run by Kevin Stiroh, one of
the bank's top regulators, who previously headed supervision at the
New York Fed.
"This is a case where the past is likely to be a less useful, a
less informative guide about what's going to happen, and models
that we've all grown to trust might be less valuable going
forward," he said in April.
Write to Simon Clark at firstname.lastname@example.org
(END) Dow Jones Newswires
May 16, 2021 08:14 ET (12:14 GMT)
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