Central Banks Preach Green With Decisive Actions Yet to Come

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Global central banks are voicing support for the fight against climate change but most are making scant progress toward adjusting their monetary policies accordingly, a new survey shows.

Responses by more than two dozen central banks worldwide showed that few institutions are taking concrete action yet to support the transition of the financial system to a more sustainable basis, according to the Network for Greening the Financial System.

Major central banks are being called on to use their massive bond-buying programs, now being expanded to assist the recovery from the pandemic, to shift investment out of polluting industries. Last week the European Central Bank earned criticism for failing to use its stimulus boost to do that, despite President Christine Lagarde’s pledge to pursue “every avenue” to tackle the climate crisis.

Most central banks in the survey saw scope to adjust their strategies to cater for climate risks but also identified creating financial distortions as a potential obstacle. An overwhelming majority believed global warming could impact the way monetary policy reaches the economy. Yet with not many having witnessed such effects themselves, only a minority have or are likely to introduce measures to mitigate such risks.

Some respondents highlighted that getting bond issuers to disclose climate threats is essential, yet only a few central banks have provided concrete answers detailing how they plan to contribute to this. And while the majority of participants agreed that tackling global warming warrants cross-border cooperation, most central banks have neither initiated nor been approached to initiate such coordination. Twenty-six central banks representing 51 countries participated in the poll.

Ahead of the ECB’s decision last week to increase emergency asset purchases to nearly 2 trillion euros ($2.4 trillion), campaigners had demanded the institution end all support to polluters -- and argued after the announcement that policy makers had missed a “once-in-a-generation opportunity.”

To be fair, the scope for central banks to integrate the fight against climate change into monetary policy is limited. Few have mandates that explicitly mention “sustainability” as an objective, and while references to “economic development” are more common, their key focus is generally on achieving a certain level of inflation.

Looking at activities outside monetary policy, monetary authorities have some progress to show. That’s according to a separate survey the NGFS presented Tuesday.

A large majority of respondents have taken initial steps in adopting sustainable and responsible investment practices in one or more of their portfolios or are planning to do so. The usage of such standards has grown markedly for three out of the four most common portfolio types over the past year, with awareness of reputational risks and the desire to set a good example cited as key motivations, the NGFS said.

Central Banks Preach Green With Decisive Actions Yet to Come

“Central banks are increasingly practicing what they preach,” Frank Elderson, NGFS chair and incoming ECB Executive Board member, and Bundesbank board member Sabine Mauderer wrote in the foreword of the report. “While this is an encouraging development, we are not there yet.”

Work is under way across the world. At the ECB, climate change is being studied as part of a wider strategic review, and the Bank of England will launch climate stress tests for commercial lenders in the middle of next year.

The Federal Reserve announced Tuesday that it has formally joined the NGFS, which has grown to represent more than 80 institutions since being founded three years ago. At the Bank of Japan, policy makers are carefully considering how they should engage in addressing climate change.

Elderson and Mauderer urged policy makers not to lose sight of the challenge, even as they’re busy crafting support packages to help their economies through the worst of the coronavirus crisis.

“The threat of climate change still exists, and the need to curb carbon emissions is as urgent as ever,” they wrote. “We cannot wait for the pandemic to pass before working toward a greener and cleaner future.”

©2020 Bloomberg L.P.

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