RESEARCHERS HAVE URGED CENTRAL BANKS across the G20 to ensure that efforts to curb shorter-term inflation do not hinder progress on the net zero transition, which could undermine longer-term price stability.
Endorsed by leading research institutes and NGOs, the 2022 update to Positive Money’s Green Central Banking Scorecard assesses the relative progress G20 central banks have made on sustainability in relation to research and advocacy, monetary policy, financial regulation, as well as other ways they are leading by example, and sets out what actions policymakers could be taking to tackle environmental breakdown.
The authors argue that the energy crisis, as well as extreme weather events, have highlighted the ways in which the environmental crisis can undermine the basic conditions for price and financial stability and jeopardise central banks’ ability to fulfil their core mandates. They also warn that interest rate rises risk choking off capital-intensive green investments whilst doing little to address supply-side inflation caused by oil and gas price volatility.
Despite Rishi Sunak promising to make London the world’s first ‘Net Zero Financial Centre’ at COP26 last year, the Bank of England remains in fifth place, falling behind European counterparts. This reflects a commitment by the European Central Bank (ECB) to limit the amount of carbon intensive assets financial institutions can use as collateral when borrowing from it, steps taken to decarbonise its own corporate bonds, and the suggestion of a targeted lending scheme offering cheaper funds for green activities.
Some progress has been made on Research and Advocacy, with seventeen of the G20 countries now having achieved full marks in that category of the scorecard, compared to fourteen in 2021, reflecting how climate is now considered an important issue for central banks. Regulators have increasingly recognised the need for tools to manage climate risks, with extensive scenario analyses looking at how financial institutions are exposed to these risks, and some central banks building climate into their supervision of financial institutions.
However, none of the G20 central banks managed to score higher than a B- overall, suggesting that the world’s biggest economies have a long way to go. The report calls for more central banks to recognise climate change as a core financial and price stability concern. They recommend action to combat climate risk through increased capital requirements on fossil fuel lending, as well as policies to shift finance towards green investment such as targeted lending schemes and mandatory private sector transition plans.
Other notable changes in the rankings include:
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France, which tops the 2022 scorecard, ranks ahead of its Eurozone colleagues because it has aligned all non-monetary portfolios with 1.5C and excluded fossil fuels. France is followed by Italy, Germany and the European Central Bank (ECB).
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Japan and China already have green lending schemes, though both have been held back for different reasons. For Japan, the deductions to its score reflect the fact that it still purchases fossil fuel assets and allows them to be used as collateral by financial institutions. In China’s case, support for coal over the past year has seen the People’s Bank of China – originally at first place in March 2021 – fall from third position to joint sixth since October 2021.
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Despite the Federal Reserve’s recent commitment to conduct a climate scenario analysis in 2023, the US is trailing behind in sixteenth place. Compared to other economies with high levels of historical emissions, the US is trailing behind on climate action.
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Brazil, home to the world’s largest tropical rainforest, has slipped from second place to joint sixth due to the central bank’s relatively slow progress in implementing its formal commitments, and India has also fallen two places to twelfth position.
Nikki Eames, Positive Money economist and lead author of the report, said: “Central banks are shooting themselves in the foot by attempting to curb short-term inflation without accounting for the climate crisis. Volatile fossil fuel prices and extreme weather events this year should be enough to convince central banks and regulators that supporting the net zero transition is a central pillar of their core mandates for price and financial stability. We need policymakers to act decisively to help shift financial flows to a credible pathway to net zero, and stop allowing financial institutions to lock in long-term environmental risks which jeopardise economic stability.”
* Read: Green Central Banking Scorecard: 2022 Edition here.
* Source: Positive Money