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It’s Friday in Frankfurt, Christine Lagarde’s first day as the new president of the European Central Bank, and protesters are brandishing a sign reading: “If the Earth was a bank you’d have long rescued it.”
The march by some 150 people to the ECB’s headquarters -- following a similar demonstration at the Bank of England last month -- highlighted how technocrats tasked with something as narrow as price stability can be drawn into one of the most emotive issues of the day. Nathalie Bromberger, a cartoonist from the German city, was among those saying the institution must broaden its horizons.
“The ECB should stop thinking in its narrow categories of just saving banks and financial markets,” she said. “I’m aware they don’t have the mandate, but really they should use their money responsibly to help protect our ecosystem.”
Most central banks, preoccupied for the past decade with financial crises, have only lately started acknowledging that global warming might become a battleground. Yet 93% of Europeans consider it to be a serious problem, and pressure is building on monetary authorities to use their regulatory power and $12 trillion in reserves to help.
Read more: Green Bonds Might Soon Find Their Ultimate Buyer: Central Banks
It’s a controversial topic. Some officials have embraced it on the grounds that climate risk equates to economic risk, while others have warned that they could wander so far outside their core mandate that they end up causing more harm than good.
In general, the focus is on three areas where central banks can have an impact: financial stability, investing, and -- most contentiously -- green bonds in monetary policy.
BOE Governor Mark Carney has pioneered attempts to address the environmental risks to financial stability. In 2015, he said investors need to wake up to the potential for huge losses, for example in the repricing of fossil-fuel investments in the move toward a lower-carbon economy. He recently said industries that don’t adjust will be punished by investors and face bankruptcy.
The European Central Bank included climate change in its Financial Stability Review this year, warning of problems if markets don’t correctly pricing the risks stemming from extreme weather events and the transition to reduced emissions.
Central banks have their own finances to manage, and that provides an opportunity to set an example by making such investments environmentally friendly. It’s an approach promoted by the Network for Greening the Financial System, a self-described “coalition of the willing” of monetary authorities that was set up in late 2017.
All but two of the 27 institutions surveyed by the NGFS said they’ve already adopted sustainable and responsible investment principles in their portfolio management, or are planning to do so. The network publishes a handbook with the most common strategies.
The options are limited. So-called “green bonds” -- debt issued specifically to fund climate and environmental projects -- account for just under 2% of the international bond market. Efforts are increasing though, including a recently created open-ended fund for central-bank investments in green bonds by the Bank for International Settlements.
The NGFS remains a largely European group -- the U.S. Federal Reserve is a notable absentee and Fed Chair Jerome Powell has said the topic is a “longer-run issue.”
When it comes to monetary policy, many of the world’s largest central banks draw a line at incorporating a climate strategy into their operations. That’s partly because policy makers have been given narrow mandates generally centering on inflation targets, and they’ve been struggling to achieve even that.
The ECB’s quantitative-easing program strives to be market-neutral, meaning it buys green bonds in proportion to market issuance -- in other words, not much.
Governing Council member Jens Weidmann said last week “there could be conflicting goals as soon as monetary policy dictates that you need to step on the brake and reduce the purchase of bonds.” Executive Board member Yves Mersch has said climate change is a sociopolitical challenge “quite far” from the ECB’s primary task, warning a more active engagement could expose the institution to legal risks.
Read more: Weidmann Warns Green QE Could Overburden ECB Monetary Policy
Central banks in emerging markets can be less constrained, with some having a mandate that includes promoting sustainable growth.
In Lebanon, for example, the amount of reserves a private bank needs to keep at the central bank depends on how much it lends to renewable energy ventures. In Bangladesh, banks can expect preferential terms when they borrow from the central bank if they pass on the money as green loans.
For Europe, change might be coming with Lagarde. The former chief of the International Monetary Fund is deeply interested in climate change and has already hinted that the ECB could turn greener.
Read more: ECB INSIGHT: Asset Purchases Set for a Green Twist Under Lagarde
Not that Friday was the best day to get started. Unfortunately for the protesters, the building was closed for a holiday and even if Lagarde was there, she’d see little from her top-floor office, which was shrouded by rainclouds.
To contact the reporter on this story: Jana Randow in Frankfurt at email@example.com
To contact the editors responsible for this story: Fergal O'Brien at firstname.lastname@example.org, Paul Gordon, Brian Swint
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