Lessons From the Pandemic Add Urgency to ECB’s Focus on Climate
(Bloomberg) -- The speed of the social and economic destruction wrought by the coronavirus pandemic is spurring central bankers to accelerate and expand their efforts to fight climate change.
After spending the past three months focusing on battling the deepest recession in peacetime, the issue is moving back up policy makers’ agenda, with a flurry of initiatives from Frankfurt to London and Amsterdam. They’ve reemphasized the long-term economic damage of global warming, and are pushing banks to be ready for the threats to their business that will inevitably appear.
“The corona-pandemic has refocused our minds -- it shows how quickly things can change and how vulnerable our economies are,” Bundesbank board member Sabine Mauderer told Bloomberg. “There will be no vaccine for climate change.”
Prominent economists such as Nobel laureate Joseph Stiglitz are urging authorities to use the pandemic as a catalyst to rebuild the world economy from the ruins of the worst recession in decades. In Europe, green investments are a key element in a 750 billion-euro ($841 billion) recovery fund proposed by the European Union, which has already announced plans to turn the continent into the world’s first climate-neutral region by 2050.
While governments can drive change through investments and regulation, central banks wield influence through supervisory powers over the financial industry as well as massive bond-buying programs that can be used to force a change in the behavior of companies. Work on that front is coordinated by the Network for Greening the Financial System, a group of 66 mostly European institutions, which published two major reports this week.
European Central Bank President Christine Lagarde hinted this month that a strategic review of policies -- put temporarily on hold due to the virus -- will likely result in new rules for its its bond-buying programs to take fighting climate change into account.
The ECB also put its weight behind an idea that would allow the EU identify companies that harm the environment so that banks and asset managers can better handle the risks. The Frankfurt-based institution has started consultations with lenders on a draft guide on how to manage and disclose climate threats.
The dangers are real. Andrea Enria, who heads the ECB’s banking supervision arm, warned this month that the exposure of the euro area’s biggest banks to the most carbon-intensive companies mean an abrupt transition to a green economy could trigger an increase in banking-system losses of up to 60%.
National authorities across Europe have taken steps to contain the risks. The Dutch central bank joined its peers in the U.K. and France in announcing plans to start reviewing how banks, insurers and pension funds incorporate environmental threats in their internal models, and flagged their “material” exposure to challenges from biodiversity loss.
The Bank of England released its own climate-related disclosures last week. While it found asset portfolios “are for the most part ahead of G-7 emissions benchmarks,” more work needs to be done to meet the government’s goal of net-zero emissions by 2050.
Yet climate-change advocates and analysts question how far central banks’ efforts can go, given that they have spent the last decade on desperate attempts to revive the global economy after the financial crisis, and are now mired in the fight against the virus shock.
While generally praised for its swift response to the pandemic, the ECB has also taken a lot of flak for purchasing large amounts of bond of polluting companies as part of its monetary stimulus.
“Politicians in Brussels have democratically agreed on a Green Deal, and it’s in line with the ECB’s mandate to follow up,” said Dirk Schoenmaker, a professor for banking and finance at the Rotterdam School of Management. “It’s a bit schizophrenic to write lengthy research on how brown assets pose a risk for financial institutions while completely ignoring them in monetary policy.”
Until recently, the ECB has attempted to brush off this kind of criticism by arguing that purchases must reflect the structure of the corporate-debt market, where green bonds account for a mere 5%. Lately though, policy makers have hinted that a rethink is under way.
Lagarde has said climate change will “very likely” become a parameter for calibrating purchase programs, in addition to efforts examining whether bonds accepted as collateral when lending to banks correctly value environmental risks.
Bundesbank’s Mauderer, who has led work on one of the latest NGFS projects studying the implications of global warming for monetary policy, has another bold suggestion for central banks to consider.
“It could make sense to buy and accept as collateral securities only from those issuers, which meet certain climate-related reporting requirements,” she said. “That could help us shield our balance sheets from potential climate-related losses, while also contributing to existing transparency initiatives.”
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