The European Central Bank (ECB) has held meetings with banking giant HSBC and asset manager Amundi on portfolio decarbonisation, reflecting the growing focus on the issue from central banks.
ECB Executive Board member Benoît Cœuré, a former Deputy Director General of the French Treasury, met with the two organisations separately earlier this year on the topic, RI can reveal. But the nature and substance of the discussion has not been revealed.
The meetings were in April and July, as shown by Cœuré’s diary here and here.
Amundi has been at the forefront in framing the debate about institutional asset management and climate risk while HSBC’s asset management arm recently backed the Climate Action 100+ initiative ‘soft launched’ at PRI in Person in September.
In October ECB president Mario Draghi said: “The ECB recognises the challenge posed by climate change and shares the view that achieving the environmental goals of the Union, including those set out in the Paris Agreement, is of great importance to our societies.”
And the Bank of England and Dutch central bank De Nederlandsche Bank (DNB) are developing ways to identify and measure climate-related risks.
Last week, a group of mostly European central banks met at the DNB’s headquarters to discuss green finance.
The event was convened by the Council on Economic Policies (CEP), the think tank whose founder members include Globalance Bank’s Peter Zollinger and Raj Thamotheram of Preventable Surprises.
Attendees included academics presenting papers, civil society organisations and mainly European central banks.
DNB President Klaas Knot opened the discussions. Knot, who recently called for more adequate carbon pricing, said sustainability was a very important topic at his organisation.
“In recent years we have stepped up research on climate change, developing a stress test for climate-related risks,” he said. “We believe a transition to a carbon-neutral economy is one of the most important long-term challenges of the economy. It is clear more investment is needed to meet climate goals.”
On the role of central banks in facilitating green finance, Knot described ideas such as “green quantitative easing” – central banks purchasing green-related assets or capital requirements inducing clean investments or discouraging fossil fuels i.e. lower capital requirements for clean lending and higher requirements for dirty lending.
But, he suggested that this direction was not compatible with the structure of central banks. “Due to our independence it is important for us to have a clear and limited mandate,” he said. “At the same time we see the enormous challenge of limiting global warning. We take an open mind for an open and interesting debate.”The day featured heated debate on the perceived neutrality and independence of central banks.
While central banks argued they were not democratically elected and couldn’t favour one sector over another to avoid distortion, academics and civil society organisations suggested that it was an illusion that central bank policy was neutral and that all money creation had a distortion effect.
For example, Sini Matikainen from the London School of Economics presented a paper entitled The climate impact of quantitative easing which found recent corporate bond purchases of the ECB and the Bank of England skewed towards high carbon sectors.
The paper calculates, from publicly available information, that 62% of ECB corporate bond purchases took place in manufacturing and electricity and gas production.
Conversely, renewable energy companies, already a small portion of the bond market to begin with, are not represented at all in ECB or Bank of England purchases, while oil and gas companies make up an estimated 8.4% and 1.8% of their portfolios, respectively.
This reflects the makeup of the European bond market, and also the eligibility criteria of the bond programmes which require investment grade status that favours large incumbents.
Matikainen says this has created a “carbon lock-in” — keeping Europe in a fossil fuel-based economy over the long term by encouraging additional debt issuance.
“This is not a deliberate attempt to exclude renewables,” said Maitkainen. “It’s about structures and we must have an effort to increase green finance aligned with the institutional framework of central banks.”
The paper recommends actions such as increased transparency around central bank’s purchases and selection process, research of their interventions on both high-carbon and low-carbon investment and revision of eligibility criteria to take a more proactive approach towards climate risk.
Another academic paper found emerging economies had examples of central banks facilitating low-carbon activities. For instance, Bangladesh Bank provides subsidised liquidity to banks lending to low-carbon activities. It has also imposed a rule that minimum proportion of bank lending should flow to low-carbon sectors, as has the Reserve Bank of India.
Emanuele Campiglio, co-author of the paper ‘Finance and climate change: what role for central banks and financial regulators?’ argued that if climate risks were found to be relevant to economic stability, regulators could act on it while meeting neutrality requirements. He suggested actions such as incorporating climate risks in asset eligibility criteria, noting the Bank of Japan has a loan programme to priority sectors, including the environment.
But he said there was a lack of empirical and reliable data on climate risk and current modelling tools were unable to grasp the complexity of the low-carbon transition.
This view was mirrored by central banks that said the understanding of climate risk was still theoretical by nature and it was very hard to make it tangible and material for today.
Another issue highlighted at the event was that of time-horizons, given that monetary policy is not typically geared towards addressing structural, long-term issues such as climate change.Also, it was argued that green quantitative easing could foster the low-carbon transition and improve borrowing conditions for renewable energy investments, though there was some concern about creating a “green bubble”.
Overall, there was consensus that central banks could play a role in research and data gathering on climate change and the financial sector. This could involve labelling, methodologies to measure climate-related risks, disclosure and stress testing.
Work on in Europe on the latter is already underway. It is understood that the DNB and the 2 Degrees Investing Initiative has convened meetings with European central banks and the European Systemic Risk Board on including climate risk in stress testing.