Huge sums of money are needed to transform our energy and economic systems and protect the planet. And yet banks in the UK still lend billions every year to extreme fossil fuel projects.
Central banks are powerful economic institutions at the heart of the financial system. They have a responsibility to take the effects of climate change and environmental damage into account.
Momentum is building to shift the financial system to one consistent with limiting global warming to well below 2 degrees Celsius, as detailed in the 2015 Paris Accord, but change may not be coming fast enough.
For the UK economy to meet its carbon budget and adapt to the effects of climate change, billions of pounds of new spending will be required. Among other policies, monetary policy at the Bank of England – which, since 2009, has involved the creation of over £500 billion – could be used to achieve this.
While financial regulation has increased since the financial crisis, the system is still at risk. Climate change presents an enormous challenge and risks destabilising our society and our economy. New tools are required to meet it. And bolder thinking is needed to ensure lending goes to where it is needed most: to climate-friendly projects in the real economy.
The Bank of England has also funded fossil fuel companies since 2009 through its corporate QE programme. That means it owns fossil fuel assets. The central bank is a public institution serving society, so should not help to damage the climate, which affects us all. It should disclose an assessment of the risk it is exposed to from climate change. Doing so would encourage private financial institutions to follow its lead and make their own disclosures, as recommended by the Taskforce for Climate-Related Financial Disclosures.
Sustainability concerns must be incorporated into regulatory tools and monetary policy decisions at the outset. This means reconsidering what central banking is in a 21st century context. Climate change and other environmental issues are here to stay, and macroeconomic policymaking needs to reflect that.
This report argues that the Bank of England needs reform to hardwire it for climate sustainability. Monetary and financial policy are both affected by climate change. To avoid policy incoherence and accelerate progress towards greener policies, political leaders should reform the Bank’s mandate.