Ben Bernanke, who was chair of the Federal Reserve during the financial crisis, glowingly referred to his actions as “The Courage to Act”.
This form of “courage”, likely also felt by those orchestrating the invasion of Iraq or the suppression of protestors in Tiananmen Square, will likely be in ample supply when the next financial crisis hits – “never let serious crisis got to waste”, after all. But importantly, the compulsion courage to act in the central banking community is no longer limited just to papering over crevasses in the financial system.
Our own Mark Carney at the Bank of England, and François Villeroy de Galhau at the Banque du France recently penned an article for The Guardian, in which they fleshed out their new ambitions:
“As financial policymakers and prudential supervisors we cannot ignore the obvious physical risks before our eyes. Climate change is a global problem, which requires global solutions, in which the whole financial sector has a central role to play.”
The most interesting of the “global solutions” that Carney & co detailed in their piece was also the one they detailed the least, stating simply: “central banks are encouraged to integrate sustainability into their own portfolio management.” without any further explanation.
Both central bankers are members of the NGFS, or “Network for Greening the Financial System”, a group created less than two years ago, of which 34 central banks are members. And the first report published by the group shines a little more light on what a central bankers war on climate change might look like.
From the report, emphasis mine:
NGFS members may lead by example by integrating sustainable investment criteria into their portfolio management (pension funds, own accounts and foreign reserves), without prejudice to their mandates…
Central banks may decide to employ part of their investments to pursue non-financial sustainability goals in order to generate positive (societal) impacts, in addition to traditional financial return goals. In this way, central banks can also actively support the development of the market for green and sustainable assets…
Notwithstanding that the focus of central banks incorporating ESG (Environmental, Social, and Governance) aspects into their portfolio management has been on own funds and pension liability portfolios, some voices have called for an extension of this approach to monetary policy. Among NGFS members, so far only one central bank, the People’s Bank of China, has a dedicated policy to promote green finance via monetary policy.
Going forward, the NGFS will consider exploring the interaction between climate change and central banks’ mandates (other than financial stability) and the effects of climate-related risks on the monetary policy frameworks, paying due respect to their respective legal mandates.
The report concludes:
As time is running out to ensure a smooth transition to a low-carbon economy, and to mitigate climate change impacts on the world’s economy and the global financial system, the momentum among the central bank and supervisory community to respond to this challenge is growing rapidly.
Central banks investing a country’s foreign reserves only in assets that have been vetted as “green”.
Pursuing non-financial goals in an attempt to create social change.
And, the icing on the cake – giving monetary policy an environmental component.
What could possibly go wrong?
The Banque du France already invests in green funds and lends money to green companies as part of its pension fund. But outside of China, nobody is printing money to directly “develop a market” for green technology. Not yet, anyway. If they do, that’s a bubble and a half waiting to happen (would certainly give new meaning to the term “greenback”).
Giving the men with the printing presses (who are not directly accountable to the public), a mandate to fight climate change will, like every other mandate they’ve been given, have massive unintended consequences. Among the more benign will be to give the retail investor an opportunity to front-run the guys with limitless pockets for massive gains, something we’ll be writing much more to you about should this in fact occur.
Whether you do or do not support the controller of your currency taking on such a political role is, sadly, of no consequence. A central banker’s Courage to Act will not be denied. And “capitalism with Chinese characteristics”, is becoming less and less a phenomenon limited to China.
Wishing you a good weekend,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates