Analysis: The head of the Banque de France responds to climate change “mission creep” claim

François Villeroy de Galhau responds to Wall Street Journal

It’s not every day that the head of a central bank writes to a newspaper but that’s what’s happened over the weekend when Banque de France Governor François Villeroy de Galhau penned a missive to the Wall Street Journal about, of all things, climate change.

It’s a situation that has also seen campaign groups wade into the fray to defend the high-level Network for Greening the Financial System (NGFS) and central banks’ involvement in the climate change debate.

Representing the 40-strong NGFS, the French central bank chief’s letter (published on Bastille Day) argued that climate change falls “squarely within our mandates” as it is a source of financial risk.

This could result in “stagflationary pressure—a long-term but certain shock that could raise prices while reducing growth”.

Villeroy de Galhau, who was formerly Chief Operating Officer of BNP Paribas group with oversight of corporate social responsibility, was responding to a recent column which questioned the legitimacy of central banks’ involvement in climate change – characterising it as “mission creep” – saying it results in “preferential treatment for particular parts of the economy (referring to green sectors)” which should be a matter for politicians alone.

“Central banks shouldn’t work to anticipate political action that might never come, desirable as that action might be,” the piece argued. “Even worse, the politicization is mostly wasted. The financial system is at best marginal to preventing global warming … if it remains profitable and legal to extract and burn oil, gas or coal, someone will.”

This was supported by readers, with one online commentator warning of a power grab by “politically-appointed, Neo-Marxist academic eggheads”.

However, Frank van Lerven of UK think tank The New Economics Foundation has challenged the idea that finance is peripheral to climate change, calling it “ludicrous”.

He told RI: “This goes against every mainstream position. Firstly, there is a significant gap in the financing of the carbon transition. Secondly, financing of the most polluting sectors is yet to wind down with nearly $2trn lent by banks to these sectors since the Paris agreement.“Thirdly, the markets are yet to price-in the externalities of climate change which are currently borne by society while financial institutes reap its profits.

“In addition, central bank mandates – such as that of the Bank of England (BoE) – often include a responsibility to support the government in its economic objectives, one of which includes international obligations such as the Paris Agreement.

“If political action in fact does not come, scenario analysis has shown that physical risks will manifest and threaten the financial system. Then the mandates of central banks will not matter as they will no longer be able to influence financial stability.”

Simon Youel of campaign group Positive Money, said: “Similar to how the Bank of England has powers to set mortgage loan requirements to meet its financial stability objective, we argue that central banks should be allowed to do the same for climate risks.

“This could mean putting forward policy including credit guidance or tools restricting fossil fuel lending, such as differential collateral requirements for brown assets and targeted refinancing operations, similar in principle to what has been implemented by the ECB.”

However, the article appears to have mischaracterised a Banque de France analysis as a proposal to “give ‘green’ bonds better treatment than other assets.”

Written by Villeroy de Galhau, the analysis instead proposed a deeper understanding of the impact of climate change on credit risk on all bonds which can be purchased by central banks – regardless of issuer. However, it explicitly warns against the use of targeted purchases of green bonds or ‘green’ quantitative easing.

He wrote: “The assumption underlying these targeted measures is that a central bank is better equipped to decide an efficient allocation of resources than democratic institutions – parliaments and governments, and private agents.

“But the idea that central banks have this type of information advantage is neither proven nor valid.”

It concludes that since the pool of green asset pools which currently comply with the Eurosystem [the EU central banking network] criteria is relatively shallow, “massive purchases” would “lead to undesirable and damaging distortions”.