Supervisors step up pressure on banks to tackle climate risk
Two motorized paragliders circled the headquarters of the European Central Bank earlier this year, before landing there to unfurl a bright yellow Greenpeace banner declaring “Stop funding climate killers”. The message to the region’s monetary policy makers was clear.
The specific target of the protesters was the more than 300 billion euros in bonds issued by fossil fuel companies that they said the ECB had accepted as collateral for its cheap loans to banks. Activists called the central bank to stop accepting these “dirty bonds” as collateral or to drastically reduce the amount it lends against them.
Even before airborne militants appeared on the Frankfurt skyline, most of the major central banks had already realized that they needed to do much more to address growing public concerns about the environment. Although the President of the ECB, Christine Lagarde, criticized the demonstrators for having “denounced the health of people [and] life maybe “, she also said that climate change was” the biggest challenge facing us “.
The issue will gain prominence on Wednesday when many of the world’s largest central bankers, including Jay Powell at the US Federal Reserve, Yi Gang at the People’s Bank of China and Lagarde herself, speak at “Green swan”Virtual conference on how to fight climate risks in finance.
The event, organized by the Bank for International Settlements, the Banque de France, the IMF and a club of 90 central banks and watchdogs called the Network for the Greening of the Financial System, highlights how far climate change has taken hold. scale in the agenda of central banks.
The ECB has made global warming a key part of its strategic review due to end in September, while the Bank of England has taken on a new mandate to make monetary policy greener and the US Federal Reserve recently joined the NGFS. Even the People’s Bank of China said it will consider including climate risks in its annual stress test of the country’s banks.
But despite this frenzy of activity, it’s still unclear exactly what central banks will do to tackle climate change. While much of the debate has focused on the potential greening of monetary policy, there are considerable obstacles to this. The area in which there will probably be much faster and more concrete action is that of banking supervision.
The NGFS recently proposed nine ways for central banks to make monetary policy greener, such as asset purchases or environmentally focused lending programs. However, he recognized that all “must overcome a range of practical and analytical challenges, including data gaps and uncertainties in quantifying risks”.
There are also concerns about central banks’ “mission evasion” that could distract them from their main inflation target. If a central bank starts buying greener assets, only to stop when inflation rises, then will it be attacked for not protecting the environment?
“Climate change is important for financial stability issues,” says Kristin Forbes, professor at the MIT Sloan School of Management and former member of the Bank of England’s monetary policy committee. “But… I’m afraid central banks just don’t have effective tools and already have too much to do. I’d rather they stick to their knitting.
A more promising avenue for central banks lies in their role as banking supervisors. This year, the BoE is organizing the first of its kind climate stress test to assess the risks of everything from extreme weather events to the demise of traditional fossil-fueled energy and industrial companies.
The ECB plans to conduct a similar exercise next year and euro area banks are already in the spotlight after the central bank published a guide on how he expects them to deal with climate risks and asked them to submit action plans to achieve this. Those who fail can expect higher capital requirements.
“Banks have a key role to play,” said Frank Elderson, vice president of supervision at the ECB and chairman of the NGFS. a recent podcast. “If needed, we can use the whole toolbox we have to make sure they become compliant [with our expectations]. It will be a journey. This is the first year. From next year and beyond, our reaction will become more forceful. “
This increasingly strong pressure is starting to be felt in European banks. Deutsche Bank chief executive Christian Sewing recently said lenders “risk losing their business license” if they don’t make green finance a priority.