Major breakthroughs on central banks and climate change

Major breakthroughs on central banks and climate change

If we’re going to stop irreversible climate change, we need to decarbonise our financial system, which channels billions of pounds into fossil fuels every year. As institutions at the heart of our financial system, central banks have a crucial role to play. They influence how money flows into the economy and oversee large swathes of financial regulation, both with far-reaching impacts on the climate.

So a year ago Positive Money called for two key things to happen, when we launched our groundbreaking report, ‘A Green Bank of England’, which looked at how sustainability can be hard-wired into everything our central bank does.

In particular, it made two recommendations:

• For the Bank of England to disclose the climate risk on its balance sheet

• For our politicians to update the Bank of England’s mandate to include tackling climate change.

Yesterday, Governor Mark Carney committed the Bank of England to doing the first thing. And the Labour Party announced they’re going to look into doing the second thing. A double win!

Labour mulls giving the Bank a climate target

In a press release yesterday, John McDonnell confirmed that the Labour Party will consult on changing the Bank of England’s mandate to reflect the climate change emergency. This is a crucial step. As we revealed in our report, there are many things the Bank of England could be doing to support low-carbon investment and steer bank lending away from high carbon and dirty energy. But we constantly hear that the Bank is unable to do so, because it’s required by its mandate to focus on monetary and financial stability.

As it currently stands, the mandate shouldn’t necessarily be a barrier to more climate-friendly policies. Positive Money and others have argued that because as climate change represents an existential risk to the financial system, it’s well within the scope of the Bank’s current role to include climate considerations in its work.

But we also believe that an updated mandate, which makes supporting the decarbonisation of the financial system an explicit secondary objective, would empower the Bank to go even further. A change to the mandate – which is set by the government – could unlock the Bank’s powerful monetary policy operations to channel billions into green investment. And it could empower the Bank to introduce tougher regulation to shift UK bank lending away from fossil fuel companies and towards a low-carbon economy.

Labour’s decision means that a ‘green Bank of England’ might be a reality if the party takes office, and puts pressure on Chancellor Philip Hammond to follow suit. This announcement comes after months of campaigning and lobbying by Positive Money. Last year, we launched our report alongside a high-level panel including Climate Change Committee chair Lord Deben, making it to page two of the Financial Times. We handed our report directly to Jeremy Corbyn’s office and met with dozens of Labour MPs including its Shadow Treasury Team.

The Bank of England will lead by example on climate risk

The good news doesn’t stop there! Yesterday Mark Carney made headlines by telling banks and insurers to get serious about the risk that climate change presents to their survival, and calling for a ‘massive reallocation of capital’ as part of the move to a low-carbon economy. The Bank has announced new expectations on financial firms to reveal how they’re integrating climate considerations into the running of their business.

Crucially, he also revealed that the Bank of England itself will begin disclosing how it manages climate risk across its operations. As groups like the New Economics Foundation have warned, some of the Bank’s policies – such as its asset purchases and collateral framework – are currently providing an implicit subsidy to fossil fuel companies. The Bank will now have to reveal more information about those functions and will come under greater pressure to make them more climate-friendly.

Again, this move comes after Positive Money supporters helped to pile on the pressure. Back in January, after hundreds of us shared our suggested questions for Carney, our very own Simon Youel asked him in person why the Bank wasn’t doing more to tackle climate change.

The Youth Strikers and Extinction Rebellion have propelled the climate crisis to the top of the agenda. The financial sector is one of the key drivers of that crisis, and we’re providing the policy solutions to align the system with a more sustainable future. It’s no small task, but these announcements are a big and important step forward. And they’re in no small part down to the work of the Positive Money movement.