NGO Positive Money argues central bank needs new mandate to drive shift away from high carbon investments - or the UK risks missing its climate targets
The Bank of England needs a major overhaul of its monetary and financial policy to take better account of climate risk and boost green investment or the UK risks missing its statutory climate change targets, a new report from non-profit Positive Money has warned.
At present the UK central bank's mandate and policy is "incoherent" on green investment and climate risk, it argues, as it focuses almost exclusively on the short-run stability of the financial system while ignoring broader environmental and climate risks and their long-term impacts.
The NGO's report - entitled A Green Bank of England: Central Banking for a Low Carbon Economy - assesses the central bank's monetary policy framework from an environmental perspective, and concludes that its monetary policy in recent years has been "actively harmful to decarbonisation efforts".
Specifically, it highlights corporate bond purchases through the Bank's Quantitative Easing (QE) programme - a policy aimed at stimulating banks to make more loans - as being "skewed" towards fossil fuels and other high carbon sectors.
Author of the report, Positive Money economist Rob Macquarie, acknowledged the low carbon transition presented huge challenges for the finance sector. But he argued the central banks which oversee the financial system have "enormous resources at their disposal, so must to more to support the green transition".
"By focusing solely on climate change as a risk to financial stability, the Bank of England runs the risk of leaving meaningful action until it is too late," said Macquarie. "Climate change also threatens the long-term viability of the economy, which is of concern to the Bank, but cannot be addressed by looking at financial stability alone. The Bank of England's mandate must be hardwired for sustainability and climate change."
Mark Carney, the Governor of the Bank of England, has been outspoken on an international stage about the need for companies and financial markets to address climate risk. He famously termed climate change the "tragedy on the horizon" and as chairman of the international Financial Stability Board (FSB) was instrumental in establishing the Taskforce on Climate Related Financial Disclosures (TCFD), which subsequently set out a raft of recommendations for listed firms and investors which aim to tackle climate risks.
Meanwhile, mainstreaming green finance and climate risk disclosure has also been a major focus for policymakers in the UK and Europe in recent years. The UK's Green Finance Taskforce - to which Bank of England was an observer - recently made a number of well-received recommendations to which the government has said it will respond later in 2018, while the EU also unveiled its sustainable investment strategy earlier this year.
However, today's report argues it is "well within the capacity" of the UK's central bank to do more to support the low carbon transition and address climate risk across its own operations.
It sets out a number of recommendations both to the Bank and the UK government, which centre on calls for a policy overhaul at the Bank to give it a set of tools to actively promote the transition to a low carbon economy. It also calls on the Treasury to carry out a review of the Bank's monetary policy framework with a view to reforming its mandate to better address environmental challenges.
Moreover, it urges the Bank to disclose the climate risks faced by the assets on its own balance sheet, stop buying bonds issued by fossil fuel firms via its QE programme, and publish its own set of green lending guidelines for commercial banks to boost the UK's growing green finance offering.
The Bank should also consider using overt monetary financing - or 'QE for the people' - to drive green investment by enabling it to buy "zero-interest-bearing, perpetual bonds from the Treasury to finance government deficit spending on green projects".
The Bank of England declined to comment on the report. However, a Treasury spokesman said its mandate for the institution "aims to deliver low and stable inflation to help households and businesses make day to day financial choices, while also supporting growth and employment".
"We are building a greener economy that works for everyone as we deliver on our Clean Growth Strategy and boost sustainable infrastructure investment through our Green Finance Taskforce," the Treasury added in a statement.
But report author Macquarie suggested any reluctance to change at the Bank of England was largely political, arguing the Chancellor of Exchequer could "very easily make simple alterations to the Bank's mandate".
Changes in the Bank's policy and mandate, he explained, were not just about just about stimulating green investment, but also about showing leadership, regulating, and providing a signal to the private sector about the seriousness of climate risk and the low carbon transition.
He highlighted the urgent need for new approaches to tackle the current shortfall in the UK's statutory carbon budgets for 2023 onwards, as well as the estimated €180bn gap in green investment needed across the EU each year to meet its international climate targets.
"When you look at scale of the monetary policy changes over the past 10 years in the face of a really big crisis, that's such a missed opportunity when there's this massive green investment gap that's got to be filled," he told BusinessGreen. "We're saying that if you change the mandate then by default the Bank would look for opportunities where it fulfils its price stability role and it does so with these positive environmental side effects while also galvanising green investment."
Green groups welcomed the report's findings. Dr Helena Wright, senior policy advisor at think tank E3G, backed calls for the Bank of England to disclose the carbon risk of its assets, adding that central banks around the world should all do more to respond to "this systemic challenge and the opportunities of green investment".
The report follows analysis last week by E3G which looked at the alignment of major development banks' strategies with the Paris Agreement, and found many of them wanting.
"The UK is striving for global leadership in green finance, and the Bank of England is uniquely placed to take the lead in greener monetary policy that tackles climate risk," she told BusinessGreen.
Meanwhile, Alex White, senior policy advisor at the Aldersgate Group, argued Carney's various high profile speeches on the need for greater climate risk and transparency made clear the bank understood the case for action to tackle climate risks. "It stands to reason that the Bank of England should live by this and disclose the climate-related risks and opportunities of its assets, demonstrating best practice to the rest of the finance industry," she said. "With the government looking at how to implement the FSB's Taskforce on Climate-related Financial Disclosure recommendations in the UK, the Bank should seek to be leader rather than a laggard."
If only some of the policy recommendations made by both EU and UK expert green finance advisory groups of late are taken on board, significant change across the financial sector is now inevitable. Policymakers and bankers alike are increasingly aware of both the challenge and opportunity presented by the need to rapidly bridging the green investment gap. Yet if the UK truly wants to remain a global leader on climate finance, there will be pressure on Carney to ensure the Bank of England embodies the same level of commitment to climate risk disclosure and investment that he espouses in his speeches on an international stage. And his position as a green leader would be even more assured if the Treasury gave him the mandate required to do the job.
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