Weekly roundup: new DNB green policies and central bank independence

July 23, 2021|Written by Graham Caswell|Bank of Russia, Bank of Japan, De Nederlandsche Bank, European Central Bank, Federal Reserve

This week, coverage of the Dutch central bank’s new sustainable finance policies, debate on the question of central bank independence, and the Bank of Russia recommends ESG disclosures.

New Netherlands Bank sustainable finance policy

Monday saw coverage of the Netherlands Bank’s (DNB’s) new sustainable finance policy, setting out its goals for the next four years. The bank aims to align its own investments with the Paris Agreement, make its own internal operations sustainable, and implement transparent reporting.

It also seeks to make eurozone monetary policy and payment systems more environmentally sustainable and wants to see “monetary tasks more aligned with climate goals”. In addition, the DNB wants to promote “informed debate on a sustainable economy” and develop “robust” sustainability data and statistics.

“Sustainability developments affect the financial-economic system and thus all core functions of DNB,” the bank said, adding that it wants to make a positive contribution to global sustainability targets. DNB is the second central bank in the eurozone after its French counterpart to commit to Paris alignment for the bank’s own reserves.

Independence from what?

Opponents of substantive central bank action on climate change often express concern about the possible dilution of their independence from politicians, but who else are they dependent on? This is the question asked by author and Georgetown University Professor Stefan Eich in an article published by Just Money, a website examining money from a legal perspective.

“Almost the entire literature on central bank independence, defenders and critics alike, converges in a shared understanding of “independence” as autonomy from immediate democratic politics,” said Eich. But there are a number of obvious forces that are potentially just as distortive and corruptive, if not more so. Eich pointed to “the unceasing and erratic demands of financial market actors, within and without the state”.

Following an overview of constitutional and accountability issues involved in “money power”, Eich asked if the existing discourse of central bank independence might be expanded to include independence from financial markets and suggests that this would increase their democrat accountability.

The influence of financial market participants on central bankers was also highlighted in an ECB response to a freedom of information request seeking a list of all meetings with representatives of BlackRock and seven other major private sector financial institutions.

Media focus on Fed’s poor climate performance

The climate impacts and responsibilities of central bankers was the topic of several mainstream media articles over the past week. In the Wall Street Journal, Megumi Fujikawa contrasted the Bank of Japan’s new green credit facility and the European Central Bank’s (ECB) new climate strategy with the US Federal Reserve’s conspicuous lack of action on climate.

The Fed’s slow response to the climate crisis was also highlighted in the Washington Post’s overview (£) of international central bank action on climate change from Katia Dmitrieva and Jana Randow. Criticism from former US president Donald Trump and a desire to avoid further clashes with an administration skeptical about climate change has been a contributing factor to the Fed’s weak response to the climate emergency, they said, in an ironic counter to concerns that action on climate change threatens the central bank’s political independence.

Brainard a possible replacement for Fed’s Powell?

An extensive Bangkok Post article outlined growing discussion about whether US President Joe Biden will appoint a new Fed chair when incumbent Jerome Powell’s term expires next February.

Powell enjoys broad support in markets and among lawmakers from both parties, said authors Nick Timiraos and Andrew Restuccia, but faces growing criticism for his weak approach to banking regulation and his failure to address the systemic risks of climate change.

If Biden replaces Trump-appointee Powell, Fed governor Lael Brainard is seen as the most likely candidate to succeed him, the article suggests. Brainard is seen as the best situated to maintain continuity with Powell’s interest rate policies while also promoting stronger regulation and climate action.

While the White House declined to comment, speculation on Powell’s fate is likely to grow until a decision is made.

Go beyond risks: a taskforce on finance-related climate impacts

James Vaccaro, executive director of the Climate Safe Lending Network, argued that the concept of ‘double materiality’ is being ignored by the Taskforce on Climate-Related Financial Disclosures (TCFD) process.

In an article in Responsible Investor, Vaccaro explained that the TCFD focuses on the risks and opportunities that climate change presents to businesses and finance, but avoids examining the impacts of businesses and finance on climate change.

“Whilst it’s entirely sensible and necessary to look at how to protect finance from the climate, all the scientific evidence suggests that this will be hopelessly insufficient unless we also address how we protect the climate and society as a whole from finance,” he said. He suggested that a new taskforce focused on finance-related climate impacts will be necessary if TCFD retains its narrow focus.

Bank of Russia recommends ESG disclosure

The Russian central bank has issued a recommendation that companies disclose their environmental, social and governance (ESG) related risks and agendas.

“It is essential to evaluate the ESG-related risks as there is a high probability they may transform into financial risks over time,” the central bank said in a statement. A slow starter in the response to the climate crisis, the Bank of Russia has recently added a sustainability section to its website, listing its objectives as “the creation of… green mortgages, green bonds, green loans” and the creation of “systems for the identification, assessment, monitoring and stress testing of ESG risks”.

The central bank is also planning to release a “verification system for financing sustainable development” by the end of the year.

Survey shows green trend in central banking

The Global Public Investor survey was released by a thinktank, the Official Monetary and Financial Institutions Forum. It revealed that central banks are moving to greener and more activist investment strategies, although half of them have yet to incorporate ESG considerations in their asset purchases.

The survey of over 60 central banks found a majority of them implementing ESG strategies in some way. Green bonds are the most popular ESG option among central banks, with over one-third of the institutions surveyed holding them. The findings are similar to those of a recent Invesco survey, which found that 63% of central banks see climate action as part of their mandate and 45% believe that mitigating climate change should be a monetary policy objective.

Politicians, NGOs and economists seek greater ECB climate ambition

An article published by a group of economists, NGOs and MEPs have called for more climate ambition from the ECB.

Referencing a recent report showing that fossil fuels assets held by the 11 largest European banks represent 95% of their equity, the article demands that the ECB exclude companies developing fossil fuels from its corporate asset purchases. It also recommends adjustment of its collateral framework and refinancing operations to align with scientifically determined emissions targets.

“For the ECB, focusing solely on climate risks and delaying the implementation of mitigation measures could impair its ability to fulfil its price stability mission and to ensure financial stability,” say the lawmakers, civil society groups and economists, pointing to growing legal threats to the bank as a result of its slow action.

This page was last updated July 24, 2021

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