From the Bank of England to the People’s Bank of China, monetary authorities of the world’s largest economies are gauging how climate change could rock the financial system. Though long committed to being “market neutral,” some are even starting to push greener investments.
Climate change is rattling the world’s central bankers. With unprecedented heat and wildfires in the American West and southern Europe, and record floods racing through German towns and Chinese megacities in recent weeks, fears are growing among regulators of a coming cascade of climate-induced economic blows potentially more far-reaching and intractable than the financial crash just over a decade ago.
In the past two months, the central banks of the world’s five largest economies — the United States, China, the European Union, Japan, and the United Kingdom — have all raised the stakes in their demands for the commercial banks they regulate to make public the looming risks they face as wild weather takes hold.
Their calls show that central bankers are already responding to concerns about their past passivity on climate — concerns reflected at a G7 meeting in June, where Western industrial leaders issued a final communique that declared, “We emphasize the need to green the global finance system … We support moving towards mandatory climate-related financial disclosures.” That means requiring commercial banks to reveal the risks to their balance sheets — and those of their clients — of both a changing climate and any rapid collapse of markets for fossil fuels as governments try to head off disaster by weaning off fossil fuels.
The world’s major central banks, which control the production and distribution of money on behalf of national governments, have traditionally sought to remain “market neutral” when carrying out their responsibilities. That means they avoid favoring one part of the economy over others. But now the biggest central banks appear to be concluding that carbon neutrality is more important than market neutrality.
“Once climate change becomes a defining issue for financial stability, it may already be too late.”
In June, the Bank of England launched mandatory disclosure of climate risks by big British banks, with the U.S. Federal Reserve indicating that it intends to follow suit. Meanwhile, the People’s Bank of China said it was making green loans in line with its government’s policy on climate change. In July, the Bank of Japan began offering no-interest loans to commercial banks funding green projects, and the European Central Bank announced that it was looking to gauge the carbon footprint of financial institutions and their vulnerability to climate change.
In addition, British Chancellor of the Exchequer Rishi Sunak recently updated the Bank of England’s responsibility “to reflect the government’s economic strategy for … the transition to a net-zero economy.” Since then, said economist Yannis Dafermos of SOAS University of London, the bank has changed its approach, “going beyond market neutrality to being much more interventionist in the fight against climate change.” In May, it published a discussion paper on options for greening its bond buying, which included setting targets for emissions from its corporate bonds.
Not to be outdone, in July the European Central Bank announced that it intends to “adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria.” Those criteria include European Union legislation to cut EU emissions by 55 percent from 1990 levels by 2030, its target under the Paris Agreement.
The debate among central bankers about how to address climate change was kicked off in 2015 by Mark Carney, then governor of the Bank of England and chair of the Financial Stability Board, an international body that coordinates central banks and financial regulators. At the Paris climate conference that year he warned that climate change was a “systemic risk” to the world financial system.
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