Victor Smart | October 3, 2023

Victor Smart reports that central banks are facing an increasing struggle to maintain momentum behind their green initiatives, ahead of November’s COP28 climate talks in Dubai. Criticism over the cost of living crisis and the official role of central banks as policy-takers, not policy-makers, is sparking debate about whether ESG is distracting from their ‘day job’ of ensuring financial stability.

Central banks face an increasing struggle to maintain the momentum behind their green initiatives ahead of November’s COP28 climate talks in Dubai.

A clear rift has opened up among central banks on the climate crisis, with some explicitly stating that global warming is not a priority for them. The shift comes as central banks battle criticism over their handling of inflation, the broader political backlash to green measures and energy crunches that have triggered new fossil fuel investment. Add in the fact that formally “policy takers” not policy-makers on climate change – and there is fierce debate whether the issue is a distraction from their primary mandate of price and financial stability. 

In the US, Republican lawmakers have launched a bitter onslaught on green policies. Chris Waller, a board member of the US Federal Reserve, in May told a gathering in Madrid: “I don’t see a need for special treatment for climate-related risks in our financial stability monitoring and policies…I believe that placing an outsized focus on climate-related risks is not needed.”

Likewise, the head of the Bank of Japan warned in January at an event in Stockholm against overstepping the mark and jeopardising central banks’ independence.

Sarah Breeden, now the Bank of England’s deputy governor, admitted in April that the fallout from the spate of recent crises such as Russia’s invasion of Ukraine has reduced officials’ “bandwidth” to address other issues. Hence it was not a surprise that at the Federal Reserve’s high-level gathering at Jackson Hole in August there was only a single mention of climate change in the keynote speech and thereafter the topic was scarcely mentioned. 

Jay Cullen, a financial regulation professor at Edge Hill University, says: “Central banks are already sailing close to the wind on green issues in terms of exceeding their mandates and prejudicing their independence. The fact now is that the political picture is moving too, with, for example, the abandonment of some climate policies by the British prime minister.”

But other central banks remain defiant on green measures. François Villeroy de Galhau, governor of the Banque de France, countered in April: “It’s not mission creep, it’s not a politicisation of our mandate – it is our core business and core duty.”

And the European Central Bank, which is similarly committed, sees several areas of COP28 where it can contribute expertise. These include its analysis which shows further delaying the green transition would harm firms’ profitability and households’ purchasing power while also pushing up credit risks for banks. Another area is helping to create incentives for private and public investment in green technology and promote globally comparable standards on labels for sustainable finance products and climate disclosures.

Ulrich Volz, head of the sustainable finance centre at SOAS, remains broadly positive. “I am not expecting many grand announcements from central banks and supervisors at COP28. But instead of grand announcements we need the work to happen on the ground, and that is progressing. Not as quickly as I would wish, but the direction of travel is clear.”

All talk, no action?

Nonetheless some observers now doubt central banks will manage to deliver meaningful change at all. One long-standing complaint from activists is that central banks are better at talk than action – a scorecard from not-for-profit Positive Money shows most central banks score full marks for advocacy but perform poorly elsewhere.

Clarisse Murphy, central banks campaigner at not-for-profit Reclaim Finance, comments that central banks are taking “very easy steps that don’t really have any impact on what happens”.

The ECB maintains it is greening its monetary policy operations. But activists complain that the ECB has failed to embark on “tilting” its trillion-euro portfolio towards green bonds as promised: since the ECB decided it no longer needed to buy new bonds it has simply hung on to existing investments from fossil fuel-related activities.

No G20 central bank, financial supervisor or regulator has accurately reflected the risks associated with financing of fossil fuel assets within its policies, declares Positive Money. 

At the moment, many argue the emphasis is too much on mitigating risk. Back in January, Ravi Manon, chair of the Network for Greening the Financial System, a consortium of 127 central banks and supervisors, acknowledged that: “We need to get a lot more imaginative and creative if we want to make sure that what we do is consistent with the global objective of getting to net zero.” 

But some fear that the decisive shift in the political landscape and other headwinds means the moment for meaningful interventions has been lost even for committed banks like the ECB.

Cullen comments: ”The ECB won’t do anything more than it has already….it’s far too divisive politically to amend its monetary policy further to tackle these issues and I cannot see how else the ECB would pursue that agenda.”

Others are more damning. Central banks always saw climate change modelling as tricky – they have found the “perfect excuse” to focus narrowly on price and financial stability, claims Murphy.