Global warming is a central bank issue
CENTRAL bankers have been dubbed “masters of the universe” for the tools and powers they have acquired since the financial crisis. Some of them now want to play a more active role in the fight against climate change.
Monetary authorities are right to be mindful of the way in which climate risk affects their mandate to ensure price stability and guard financial stability. But that is different from seeking to promote the shift to a “greener” economy, which is the role of government.
To do so, central bankers may need to extend the supervisory horizon beyond their usual time span. Climate change may only pose a threat for the balance sheet some years down the road, but these risks should be assessed now. Villeroy de Galhau argued in his speech that the financial sector should move towards “a compulsory transparency requirement”, so that companies are forced to provide a snapshot of their climate-related risks. It’s an idea supervisors around the world should embrace.
The problem with this idea is that it requires more speculation than central banks should be tasked with. What if this shift to a low-carbon economy happens more slowly than anticipated or does not happen at all? Another problem is deciding where to draw the line when it comes to central banks nudging economic actors along: Should central banks also then impose higher capital charges for loans to the gun industry just because they expect that at some stage there will be curbs in a country such as the US?
In “promoting green investment” a central bank would risk overstepping its mandate. By choosing to treat bank loans differently depending on their green credentials, a central bank could also be accused of distorting competition in the economy.
Over the last decade, monetary authorities have pushed their toolkits to the extreme. As a result, they have come under closer scrutiny from voters and politicians, who have questioned their independence and demanded greater accountability. The last thing central bankers need now is to suggest they are seeking to influence policy that should rightly be the preserve of elected officials.