Why Central Banks Need to Step Up on Global Warming

by Adam Tooze – July 20, 2019

Foreign Policy

In October 2012, the global financial system got its first taste of the effects of climate change when Hurricane Sandy roared through lower Manhattan, shutting down Wall Street. Amid the blackout, the power remained on in the tower containing the headquarters of Goldman Sachs, offering to the world a striking if accidental symbol of a future age of climate inequality.

As the investment bank stood firm, the U.S. government’s outpost on Wall Street, the New York branch of the Federal Reserve, made plans to pull up stakes. In response to the hurricane, the Fed created new backup capacity for market operations farther inland, at the Federal Reserve Bank of Chicago.

Descended from historical port cities, it is not by accident that the world’s leading financial centers—New York City, London, Singapore, Hong Kong, Shanghai—are vulnerable to flooding. But the larger challenge that climate change poses is not so much the physical as the systemic risk. What central bankers—the world’s preeminent economic decision-makers since the 1980s—are beginning to worry about is the potential for climate change to trigger financial crisis.

They have been relatively late to the problem. Mark Carney—formerly of Goldman Sachs and the Canadian central bank, now governor of the Bank of England—can take credit for first raising the issue in financial circles at an after-dinner speech at Lloyd’s of London in September 2015. Two years later in Paris, leading central bankers and regulators founded the Network for Greening the Financial System (NGFS), which aims to throw the weight of key financial institutions behind the goals of the Paris climate agreement. The membership of the NGFS now includes most of the central banks of the G-20, such as the European Central Bank and the People’s Bank of China.

Private financial actors have also joined the green finance bandwagon. At the One Planet Summit in New York City in 2018, 23 leading global banks, eight of the top 10 global asset managers, the world’s leading pension funds and insurers, the two preeminent shareholder advisory service companies, and other major financial firms—which are together responsible for managing almost $100 trillion in assets—committed themselves to the transparency principles of the blue-ribbon Task Force on Climate-related Financial Disclosures, which was launched by Carney in his capacity as head of the Financial Stability Board and is chaired by Michael Bloomberg.

It is telling that the only financial authority not to be involved in these initiatives is the U.S. Federal Reserve, the most powerful central bank in the global financial system. But even if it were to come aboard, the most critical question would remain whether the green agenda of the world’s central banks is adequate to the challenge of mitigating the effects of the climate crisis—and perhaps holding it within manageable bounds. The central banks have the powers to be a major part of the climate response. As of yet, their response is defensive, focusing on managing financial risks. The rest of us have no choice but to hope that they move into a more proactive mode in time.

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