© Reuters. FILE PHOTO: The headquarters of the European Central Bank (ECB) in Frankfurt, Germany, March 12, 2016. REUTERS / Kai Pfaffenbach / File Photo
(Reuters) – The Bank of Japan on Friday unveiled a plan to increase funding to combat climate change, a surprising move that underscores the growing importance of the issue for central banks.
What follows is a snapshot of how some of the world's largest central banks are addressing and, in some cases, helping to address the risks associated with climate change, as well as their reflections on how much more they should be doing.
U.S. FEDERAL RESERVE – The Fed has joined the Network for Greening the Financial System (NGFS), an international group looking for ways to integrate climate risk into bank management, oversight and regulation. It has started doing more research on the economic effects of climate change.
However, Fed chairman Jerome Powell is reluctant to go as far as other central banks on this issue, arguing that policies that directly address climate change should be decided by elected officials.
While agreeing that climate change could have a deep impact on inflation, employment, productivity and other economic policies, he said at a conference in June: "Climate change is not something we take into account directly when setting monetary policy".
EUROPEAN CENTRAL BANK – The ECB is already using its supervisory powers to compel banks to play their part in financing polluters and will conduct a climate stress test next year. Initial results show that around 90% of banks do not yet adhere to the guidelines of the ECB when assessing climate risk.
The ECB is also considering adjusting monetary policy to favor companies working to reduce their carbon footprint or to punish polluters. Options being considered include deferring asset purchases in favor of companies with low emissions or those making a concerted effort to transform their business.
The bank is considering changing the rules to make it more difficult for lenders to fund environmentally harmful projects. With commercial banks having ECB loans worth over 2 trillion euros ($ 2.4 trillion), increasing the collateral requirements for brown assets could quickly increase the cost of financing.
BANK OF JAPAN – While the Japanese central bank remains reluctant to buy green bonds, it has announced that it will provide funds to financial institutions that will encourage loans and investments for activities to combat climate change.
Details are not known until July, but the BOJ said the program will be modeled on a similar model that offers financial institutions cheap loans that encourage lending in areas considered growth industries.
The BOJ will also publish a list of non-monetary policy measures this year, including research and analysis of financial risks related to climate change.
PEOPLE & # 39; S BANK OF CHINA – PBOC Governor Yi Gang said in April that China had increased the allocation of green bonds in its foreign exchange reserves while controlling investments in polluting assets. Under the green bond rules, no funding can flow to coal projects.
Yi also said the PBOC will incentivize financial institutions to support such transitions and introduce new tools to help finance carbon emissions reductions. He said the PBOC has stress tested lenders for climate change risk and will monitor and assess their green transformation.
The bank has also been involved in regional pilot projects to drive clean investment and encouraged rural banks to provide green loans. PBOC Deputy Governor Liu Guiping said work is starting on a national carbon accounting system to meet China's goal of carbon neutrality by 2060.
BANK OF ENGLAND – The Bank of England has put climate change high on its agenda since 2015 when former Governor Mark Carney warned of the risks to insurers and other investors from a possible collapse in assets like oil and gas reserves.
In June, the BoE started its first green stress tests for top banks and insurers to assess their exposure to climate risks. But for now it won't force them to hold more capital by doing so.
The BoE has also announced that it will use its £ 20 billion ($ 27.7 billion) corporate bond to encourage companies to cut greenhouse gas emissions faster.
SCHWEIZER NATIONAL BANK – SNB Chairman Thomas Jordan said last year the bank would exclude coal companies from its massive stake offer, but stressed that the main actors in climate policy should be elected governments and parliaments and that monetary policy cannot replace substitute.
SWEDISH RIKSBANK – The Riksbank adopted sustainability targets for the management of foreign exchange reserves in 2019 and sold bonds from the oil-rich Canadian province of Alberta and parts of Australia because greenhouse gas emissions are too high in both countries.
The bank also reports on the carbon footprint of its holdings in corporate bonds and this year started reviewing purchases to ensure that it only purchases paper from companies that meet sustainability standards.
RESERVE BANK OF NEW ZEALAND – New Zealand's central bank invested US $ 100 million in the Bank for International Settlements’s US Dollar Green Bond Fund in 2019 and wants to use its balance sheet to help achieve climate change and sustainable finance goals.
It has announced that it will examine what adjustments it can make to its liquidity operations – including eligible collateral and pricing – to mitigate its own financial risks and contribute to the development of the sustainable financial market.
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