Central banks and climate change

If you haven't been living under a rock, you are aware of a few things you can do to help protect the climate: Don't use plastic straws, buy local produce instead of fruit from faraway places, fly as little as possible etc.

Then there are actions taken on the national level. Countries have been making commitments to reduce their CO2 emissions and step away from coal power plants in order to keep global warming to below 2 degrees Celsius compared to preindustrial times. In countries where climate action doesn't top the government's list of priorities, like in the US for example, cities or states have stepped up, imposing rules or setting goals of their own.

But in addition to individual, local and national efforts to tackle the climate crisis, another group has been getting involved as well: large-scale investors. Big pension funds and insurance companies have joined the environmentalist effort by working toward carbon neutral portfolios and sustainable growth. Another important player in this field are national central banks and supranational financial institutions.

They were in the spotlight at an International Monetary Fund (IMF) event hosted in Washington DC on Wednesday, titled "Can central banks fight climate change?" The seminar was part of the joint annual meeting of the IMF and World Bank in the US capital. It also marked the first appearance of the IMF's new managing director Kristalina Georgieva at the annual meeting.

"At the IMF, we look at risks, and climate change is a risk we now have to include," Georgieva said. She emphasized how important the issue was to her and proceeded to ask the audience to raise their hand if they believed the IMF should "stay out of this climate change business." No one did.  

Before she became the head of the IMF, Georgieva was the chief executive at the World Bank, where she started in 1993 as an environmental economist. As IMF director, she has said that one of the organization's long-term objectives will be dealing with climate risks. Recently, the IMF has been criticized for providing countries hit by natural disasters with loans that these states are likely unable to pay back. Aid organizations have asked Georgieva to review IMF support for nations struck by earthquakes, tsunamis or hurricanes — events that are occurring more frequently due to climate change. 

Banks cannot institute climate policies

Shamshad Akhtar, one of the panelists and former UN Under-Secretary-General, said that many countries can already feel the consequences of the climate crisis.

"One cyclone, one tsunami, can disrupt [a nation's] economic future for quite some time," Akhtar said.

So what can central banks do in order to keep climate change in check and prevent those natural disasters from becoming a regular occurrence?

"We will include climate change scenarios in our financial analyses and risk assessments," said panelist Sabine Mauderer, who is a member of the executive board of the German central bank, the Bundesbank. But she also pointed out limitations to the actions central banks could take: "We cannot substitute climate policies."

Suggestions brought up during the discussion for what central banks can do included offering different interest rates for green (environmentally friendly) and brown (fossil-fuel based) assets and using different risk-weighting for each of them.

While the panelists couldn't agree on this, everyone agreed with Georgieva's course of action: "We take the climate change science as a given, then try to figure out the economic implications and act accordingly."  

Climate change, 'the challenge of our lifetime'

Central banks aren't the only ones doing that. In September, a group of the world's largest insurers and pension funds vowed that they would transition to net-zero emissions portfolios by 2050. The "Net-Zero Asset Owner Alliance" was initiated by German insurer Allianz and other investment groups in early 2019 and is responsible for a total of $2.4 trillion (€2.17 trillion) in assets. The move was announced at the United Nations Climate Action Summit.

"Mitigating climate change is the challenge of our lifetime," Allianz CEO Oliver Bäte said in September. "We, as asset owners, will live up to our responsibility and, in dialogue with the companies in which we invest, steer towards low-carbon business practices."

Giulia Christianson, a senior associate with the research organization World Resources Institute (WRI), told DW that actions like the ones taken by the Net-Zero Asset Owner Alliance were a good start, but that the investors needed to be more detailed in how they would move forward.

"They need to share how they will follow through on their pledges," Christianson said.

At the IMF seminar on climate change, managing director Georgieva promised that the IMF would incorporate climate change as a factor in their country risk analyses in less than a year from now. To loud applause, she closed the meeting with a confident "See you right here next year!"