“Central banks are rushing headlong into climate policy. This is a mistake. It will destroy central banks’ independence, their ability to fulfil their main missions to control inflation and stem financial crises, and people’s faith in their impartiality and technical competence. And it won’t help the climate.” So said the renowned American economist, John Cochrane, at a recent European Central Bank (ECB) conference.
The move by central banks into this area has been contentious. It can be traced back to a speech given by the then Governor of the Bank of England, Mark Carney in September 2015. Titled “Breaking the Tragedy of the Horizon”, the address covered the role of regulators in helping the market to price climate related risk. It was followed, two years later, by the establishment of the Network for Greening the Financial System (NGFS). Initially comprised of eight central banks, the network now numbers 89 organisations, including numerous regulatory authorities. Perhaps most significantly, the US Federal Reserve (Fed) joined the club last December.
There is broad agreement across the financial sector on the need to ensure full disclosure of environmental risks associated with asset portfolios. Full disclosure is not without its challenges – both in respect of the modelling and valuing of physical and transitional risks, and the recognition of a workable global standard. Nonetheless, this consensus includes even those central bankers who remain less than wholly keen to fully embrace climate policy as part of their remit.
Opinions are, though, divided on the question of how far the green agenda should guide central banks’ operational targets and, by extension, monetary policy. Most explicitly, this might be visible in the bond purchases that currently constitute an integral element of COVID-19 stimulus measures. Recovery strategies that favour green industries will have the direct effect of lowering the cost of capital in the sector – doing so at the expense of ‘brown’ industries.