Climate Change and Central Banks

In diesem Kommentar plädiert Andreas Dombret, Vorstandsmitglied der Atlantik-Brücke, dafür, dass Zentralbanken nicht für den grünen Umbau der Industrie verantwortlich sein können. Dieser Beitrag ist zuerst in den Financial News erschienen.

by Andreas Dombret

The role of the financial sector in combating climate change is shaping up to be one of the central issues at the forthcoming COP28 taking place later this month and next in the United Arab Emirates. According to Sultan Al Jaber, President of COP28, climate finance is the pivotal issue at the core of the summit because finance provides the means to “transform goals into reality.” He is right about that. The plan is to unveil a new package of measures and a roadmap developed by the Independent High-Level Expert Group (IHLEG) on Climate Finance, address the role of the financial sector in helping to deliver the investment needed for the transition to net zero and ensuring an equitable transition that takes on board the constraints on developing countries.

This focus on finance will inevitably bring the sensitive issue of the role of central banks into the spotlight. Indeed, the IHLEG includes central bankers past and present among its members.

It is widely accepted within central banks and the wider financial sector that global warning poses an immeasurable threat to life on our planet and that the consequences for the financial sector are profound, and I very much agree with this assessment. As overseers, regulators and supervisors of the financial system, central banks undoubtedly have an important role to play here. But increasingly they have been cajoled into taking on a role that has the potential to threaten central bank independence and should rightly be played by governments.

Where central banks – unelected powers as they are – indisputably have an important role to play is in tackling the impact of climate change through bank supervision. The financial sector is impacted in numerous ways by global warming. There is the physical risk of assets being lost due to natural disasters, and the transition risks caused by the shift towards renewable energy, resulting in stranded fossil fuel assets.

Some of these risks are easier to spot than others. For instance, financing companies or projects related to fossil fuels – whether it is a coal-fired power station or gas pipeline – carries the risk for banks of being burdened with stranded assets. Another example would be lending on properties that are built on flood plains. However, other significant risks such as environmental vulnerabilities in corporate supply chains may be much less visible.

Central banks as regulators and supervisors have a critical role here in ensuring that banks understand the environmental risks in their portfolios and are properly managing the risks on their balance sheets.

Managing risks in the financial system without accelerating the very problems caused by climate change is one of the big challenges for central banks. Stop lending to brown industries and environmental polluters and you may simply hinder the process of adjustment for companies that are seeking to do the right thing by reducing their carbon emissions. 

Ultimately, though, central banks should be taking decisions based on their responsibility as regulators and bank supervisors. When it comes to monetary policy, most central banks have a strict mandate to control inflation. They should stick firmly to it.

Of course, the macroeconomic impacts of climate change can affect monetary policy decisions as well as financial stability. Physical impacts such as changes in the weather – storms, floods and rising temperatures – as well as transition costs can all affect inflation.

However, while central banks need to take account of these issues in determining monetary policy and carrying out their price stability mandate, encouraging the green transition is not their responsibility. That is a political issue, and being caught up in promoting government policies outside their price stability mandates is a very slippery slope.

It is not always easy to justify the way some central banks have favored green bonds in their quantitative easing programmes. The EU’s green taxonomy, for example, has been criticised for including natural gas and nuclear energy, and it is hard to prove how green some of the green bonds really are. It also means prioritising some companies over others and, again, it may disadvantage brown industries that need finance to transition.

Some central bankers such as Fed chairman Jay Powell have stated clearly that it is not their job to pursue social goals that are not tightly linked to their statutory goals. The Fed, said Powell, is “not a climate policymaker and never will be”.

Others see their responsibilities rather differently and increasingly it is becoming accepted that central banks should play a role in the green transition. Publications such as Green Central Banking make the case that central banks should adjust monetary policy and bank capital requirements to guide the allocation of capital and move investments away from fossil fuels. They also rank G20 central banks on their green policies and initiatives, with the Banque de France heading the table.

All this is rather dangerous territory for central banks, which are being politicised from both without and within.

Perhaps the most difficult political issue in the transition to net zero is finding equitable solutions to the challenges facing the developing world. This requires making political choices, including what is more important for lesser developed economies: Fighting climate change or fighting poverty first. While central banks have an important role in supervising the financial risks associated with the energy transition, they do not have the expertise, not the authority nor the mandate to go any further. In order to preserve democratic accountability and central bank independence, it is up to governments to step up and do more. Governments should determine the role the financial sector should play in driving forward the climate agenda, and COP28 is a very important forum in this regard. As for central banks, I expect they will be sticking to their knitting.

The writer, a former member of the Bundesbank‘s board and the ECB’s supervisory board, is a global senior adviser at Oliver Wyman and a member of the board of Atlantik-Brücke.