64 Finance & economics The EconomistDecember 14th 2019
A
s far asinterest rates are concerned,
the new boss of the European Central
Bank (ecb), Christine Lagarde, seems large-
ly in agreement with Mario Draghi, her pre-
decessor. Where she seems to differ is in
wanting the bank to be greener. On Decem-
ber 2nd she told European parliamentari-
ans that a planned review of its monetary-
policy strategy should take in the impact of
climate change. Other central bankers, too,
are going green. In recent months rateset-
ters from Sydney to San Francisco have
opined on the impact of climate change on
economic and financial stability. The sub-
ject has long preoccupied Mark Carney, the
governor of the Bank of England, who is
soon to become the un’s climate envoy.
So far central banks have focused on the
impact of climate risk on the financial sys-
tem. But activists argue that, just as central
bankers saved the global economy during
the financial crisis, so too must they tackle
the next emergency by shifting capital
away from polluters and towards greener
uses. Europe’s technocrats seem willing to
consider the idea. Others caution that it
should be a job for politicians instead.
In 2015 Mr Carney set out the channels
through which climate change could
threaten financial stability. Financial firms
are exposed to physical risks: floods, for in-
stance, lead to big insurance payouts and
sink the value of banks’ mortgage books.
Then there is “transition” risk. New gov-
ernment policies, such as a carbon price,
could see investors dump the assets of pol-
luting companies. Share prices could col-
lapse, and defaults on bank loans rise. Pol-
luters also risk climate-related litigation.
Exxon, an oil company, was accused of
misleading investors over the costs of cli-
mate change, though on December 10th a
court in New York found it not guilty.
So it is important to understand compa-
nies’ exposures to climate risk. In 2015 cen-
tral banks from the g20group of large
economies set up a “task force” to encour-
age disclosure. To date these suggest that
exposures are significant but not daunting.
As of June nearly half of the world’s largest
500 companies (by market capitalisation)
had reported exposures, much of which are
expected to be realised within the next five
years. Those added up to $1trn—or 6% of
the firms’ total market value.
Some supervisors have started includ-
ing climate risk in their assessments of
banks and insurers. The Bank of Englandrequires banks to have a plan for dealing
with such risks. The Network for Greening
the Financial System (ngfs), a group of 51
central banks and supervisors, collates
guidelines for regulators and disseminates
scenarios to help analyse potential losses
to the financial system. The Dutch central
bank was the first to conduct a stress test
along these lines in 2018, finding the effects
of climate risk to be “sizeable but also man-
ageable”. Dutch banks, exposed mostly
through their loans to companies, stood to
lose up to 3% of their assets. Insurers and
pension funds, exposed through holdings
of corporate bonds and equities, could
make losses of around 10%.
The People’s Bank of China (pboc)
helped set up the ngfs, and has led efforts
to firm up the definition of a “green bond”.
Malaysia’s central bank is working on a
similar taxonomy with the World Bank,
and in September hosted a powwow on cli-
mate change. But one big emitter has been
relatively reticent. Although America ac-
counts for 15% of the world’s emissions, its
Federal Reserve is not part of the ngfs—no
doubt reflecting a lack of political interest.
Even the Fed, though, is talking about
how climate change might eventually af-
fect the economy. In November Lael Brai-
nard, a member of its board of governors,
said climate-related disruption could af-
fect productivity and long-term economic
growth, with consequences for interest
rates. Central bankers in commodity-pro-ducing countries such as Norway and Aus-
tralia note that a shift from polluters would
alter the structure of their economies.
A far more controversial question,
though, is whether central bankers should
seek to change polluters’ behaviour. As part
of its asset-purchase scheme, the ecb holds
€183bn ($203bn) of corporate bonds. Its
purchases are broadly representative of the
market. Energy and utility firms, which are
sizeable issuers of corporate bonds, ac-
count for roughly a third of the ecb’s cor-
porate-bond holdings. On November 27th
former central-bank officials and activists
pressed Ms Lagarde to stop buying dirty as-
sets or accepting them as collateral when it
lends to banks. She plans to study the idea.
Supporters argue that such steps would
help correct investors’ failure to price pol-
luters’ riskiness in full. They would not
necessarily conflict with the day job of cen-
tral banks, says Patrick Honohan, a former
head of Ireland’s central bank. Many are
charged first with ensuring price stability,
and second with supporting wider govern-
ment policy. But critics are unconvinced.
In October Jens Weidmann, the head of
Germany’s Bundesbank, worried that a cli-
mate objective could compromise rate-
setters’ commitment to stable inflation.
Greening asset purchases would mean
deciding how much polluters should be pe-
nalised—a job for elected politicians, not
technocrats, says Tony Yates, an economist
formerly at the Bank of England. Notably,
the pbocaccepts green bonds as collateral
and gives banks’ green assets favourable
regulatory treatment. But central banks in
places where the government holds less
sway may be loth to follow its lead. As its
economic and financial effects become
clearer, climate change is certain to loom
larger in central banks’ thinking. What they
do about it will depend on their willing-
ness to tread on political turf.^7Central bankers debate whether tackling climate change is mission-critical or
mission creepGreen central bankingCarbon capture
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