Central Banks Are the World’s Newest Climate Change Activists

April 26, 2019, 7:00 AM UTC

As groups of Extinction Rebellion protestors glued themselves to public transit and closed down large swathes of central London last week in a series of demonstrations that continued Thursday, a very different group was gathering just a couple hours’ train journey away in Paris.

They, too, were meeting to discuss the impact of climate change, what they would do about it, and to send an urgent message to the world.

They just so happened to be some of the world’s largest central banks.

“No country or community is immune,” read an open letter signed by Bank of England’s governor Mark Carney, Bank of France Governor François Villeroy de Galhau, and Frank Elderson, who chairs the Network for Greening the Financial System and serves as an executive director at the Dutch central bank. “The prime responsibility for climate policy will continue to sit with governments. And the private sector will determine the success of the adjustment. But as financial policymakers and prudential advisors, we cannot ignore the obvious risk before our eyes.”

Momentum is building behind central banks’ pragmatic approach to climate change, one that sidesteps the moral or political case and goes straight to the heart of what central banks do: manage a nation’s financial risk. With a warming climate threatening the value of loans, insurance, industries, and whole economies, those banks say doing nothing is not an option.

“They are very clear that they want to deal with this issue,” says Danae Kyriakopoulou, chief economist at OMFIF, a London-based think tank and forum for central banks. “It’s an issue of financial stability.”

The political split

The Network for Greening the Financial System (the NGFS), aimed at central banks and supervisors, was behind the letter, which accompanied the release of the NGFS’s first report and a number of recommendations for addressing climate change risk. Those ranged from requiring banks to report their exposure to climate change, to steering their own funds towards sustainable investing, to pushing for more data and transparency on how climate change will affect economies.

The group has grown from just a handful of mostly European banks in late 2017 to 34 central banks and supervisors by April 2019, plus observers, stretching from the People’s Bank of China to central banks in Thailand, Greece, and Colombia. Institutions including The World Bank and the Bank For International Settlements are also involved.

That membership currently represents a third of the global population, two-thirds of the world’s systemically important banks and insurers, and nearly half of the world’s greenhouse gas emissions, the group says.

To be sure, recommendations are different than real action, and some central banks are far ahead of others in putting solutions into practice. Even while most central banks are independent of their governments, politics still matter.

“It would be naïve to think that a central bank would press ahead if they didn’t have a degree of political backing,” says Jon Williams, a partner at PWC in London covering sustainability and climate change.

But still, momentum is building behind the movement. It started in England in 2015, experts say, when the Bank of England’s Carney warned that “climate change is the tragedy of the horizon.” Last week, that bank announced it would be the first in the world to set out how it expects the banks and insurance companies under its watch to disclose how they are managing the financial risks of climate change.

Mark Carney Bank of England
Governor of the Bank of England Mark Carney helped kickstart central banks’ activism on climate change in 2015. (Daniel Leal-Olivas—AFP/Getty Images)
Daniel Leal-Olivas—AFP/Getty Images

The People’s Bank of China, too, has been a leader, chairing one of the NGFS’s groups on supervision of banks’ exposure to climate change.

But with the U.S. backing out of the Paris Agreement, the U.S. Federal Reserve System is notably absent from the list of members, despite some members of the Fed saying publicly that addressing climate change falls under the bank’s mandate.

“It’s very difficult for the Federal Reserve to engage in this issue,” says Kyriakopoulou. “So we do see this [political] link there.”

Risk Over Social Responsibility

Speaking in Paris last week, Sabine Lautenschläger, a member of the executive board at the European Central Bank, summed up the results of a pilot study into how a group of non-central banks are adapting to climate change.

“Banks seem to have approached this topic from a corporate social responsibility perspective rather than from a risk management perspective,” she said.

The message was clear: dealing with climate change was being treated as a “nice to have,” more in line with improving banks’ images than in shoring up looming risk. Instead, Lautenschläger urged action—immediately.

The shift in perspective that Lautenschläger’s advocating for is already happening in another buzzy business topic: diversity.

Diversity was long viewed as a nice—or even moral—focus for a company. But, more and more, it’s being presented as a core business issue, following a January 2018 McKinsey report that linked diversity to profits and a push by shareholders such as BlackRock and Vanguard to increase board of director diversity as a means of improving financial performance. Diversity, investors have said, isn’t a tangential political or social pursuit—it’s tied directly to a firm’s bottom line.

Now, central banks are making a similar case when to comes to addressing climate change. In their view, it is not reserved for just progressive or politically-minded institutions, since it has undeniable business ramifications: banks facing an inability to pay out loans, insurers having to cover skyrocketing natural disaster claims, and economies needing to transition on an unprecedented scale to low-carbon models, a switch that will affect every single industry. In short, it’s “not just window dressing,” says Kyriakopoulou.

That approach could help shift the needle for sovereign wealth funds, too. In some countries, those funds are directly managed by central banks, which could now face pressure to shift their holdings towards greener industries or away from assets that could have a greater climate risk.

In March, Norway’s $1 trillion sovereign wealth fund, which is managed by the country’s central bank, said it would sell some holdings in energy companies that explore for and produce oil and gas (the fund will still retain holdings in energy companies). Its logic was based on risk: given the country’s economy is already so dependent on oil and gas, it does not make sense to continue doubling-up the exposure.

Could the pragmatic approach work for central banks, too?

“If you get in with the herd that says climate change is a financial risk, then central banks have all the tools,” says Williams. “I think what you’re seeing is a wave of progress.”