Time - USA (2021-11-08)

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These actions could transform investment...... to help curb climate change

GRAPHIC BASED ON REPORTING BY EMILY BARONE WITH INPUT FROM NATALIA OSPINA (OMFIF), DAVID BARMES (POSITIVE MONEY) AND MEGAN GREENE (KROLL); GRAPHIC DESIGN BY LON TWEETEN

against their climate-change risks, which could

spur banks to do more business with greener fi rms.

There are questions about how far central banks can

or should go with those eff orts. Central bankers are not

elected, and they have mandates that grant them au-

tonomy when it comes to, say, managing infl ation, but

they’re not meant to pick favorites in an open market.

This issue is particularly sticky in the U.S. Although the

nation’s central bank, the Federal Reserve, joined the

NGFS in December and later formed a committee to ex-

plore climate risks to fi nancial stability, it also intends

to be neutral in the market.

“We have a responsibility to think about how climate

change impacts our existing mandates around things

like safety and soundness, fi nancial stability or mone-

tary policy,” said Kevin Stiroh, head of the supervision

group at the New York Federal Reserve, at an OMFIF talk

in April. “It’s a long- standing Fed position that banks

make their own decisions about which legal businesses

they engage with.”

NUMEROUS HEADS of central banks, including Christine

Lagarde, president of the euro zone’s, have prioritized

climate. “The most important tools that are needed lie

outside of our mandate,” she said in January, “but the

fact that we are not in the driving seat does not mean that

we can simply ignore climate change, or that we do not

play a role in combatting it.” What that role could entail

remains fuzzy. The mandates of some central banks, like

those of England, France and Brazil, explicitly mention

climate change. But even those banks worry about going

too far, says Megan Greene, a global chief economist at

advisory fi rm Kroll. “If they actually use their monetary

policy tools to address climate change, then they are in-

herently picking winners and losers,” she says. “They’re

still pretty wary of that.”

So far, most central banks are still trying to fi gure out

the risk posed by climate change. They’re evaluating

their own portfolios and asking—but typically not yet

mandating—commercial banks to disclose which loans

and assets are tied to carbon- intensive sectors or are vul-

nerable to green swan events. With that information,

climate- progressive central banks are running predic-

tive models to test how fi nancial institutions would fare

in diff erent climate scenarios. These stress tests could

one day lead to policies like requiring banks with greater

climate risk to hold more capital. Because banks make

more money by lending rather than holding their capi-

tal, such requirements may lead them to engage with

greener companies and raise interest rates on loans

to dirtier ones. In turn, that could push businesses to

check their own risks and reduce their carbon footprints.

For now, the fi nancial world is still fi guring out how to

assess what is “green” and what is “dirty.” Without that

framework, it’s hard to do things like peg interest rates

or collateral requirements to environmental friendliness.

Another challenge: international commercial banks have

noted that when climate- risk assessments are not uni-

form across countries, it creates an unlevel playing fi eld.

Finding common ground won’t be easy, as there are at

least 200 climate- risk frameworks across 40 countries,

according to an International Monetary Fund analysis.

On top of it all, central banks generally forecast in quar-

terly time frames—not the decades it will take to achieve

net-zero carbon emissions.

With the debates over which assets are green vs. dirty,

how to uniformly calculate them and what the climate

scenario will actually be in decades’ time, modeling cli-

mate exposure is like baking from a recipe that lists nei-

ther all the ingredients nor standard measuring units nor

oven temperature. But as on a baking show, the clock is

counting down. “We’ve not even completed the explor-

atory phase yet,” said Sarah Breeden, executive director

for fi nancial stability and risk at the Bank of England,

at an OMFIF conference in September. “However, we

do have a code red for humanity.” □

More green

investment will

decarbonize the

economy, which

will ultimately

help prevent

climate disasters

The fi nancial

system will be more

resilient to climate

disasters and will

be better prepared

for the transition to

a net-zero economy

Investors may

shy away from big

emitters. Some

banks offer interest

rates pegged to

companies’ climate

targets

Companies

pursuing greener

projects could have

an easier time

raising money in

the lending and

capital markets

As regulators get
better at measuring
and assessing risk,
they may eventually
require lenders to
hold more capital
to cover their risks