Report finds central banks failing on climate action

Released in advance of the Federal Reserve’s annual Jackson Hole meeting, a study assessing twelve of the world’s largest central banks against ten climate-related policy criteria has found all failing to align their lending, asset purchases and regulatory activities with the Paris Agreement target.

Published by US-based climate research and advocacy group Oil Change International (OCI) and endorsed by twenty leading civil society organisations focusing on finance and climate change, the comprehensive report shows that while central banks have powerful tools to reduce fossil fuel financing and associated greenhouse gas emissions, they aren’t using them.

Author and Senior OCI Campaigner David Tong reviewed the climate-related policies and activities of the European Central Bank (ECB), the People’s Bank of China (PBOC), the Fed and nine other major central banks, assessing them across ten emissions-reducing policy tools, including the exclusion of fossil fuels from asset purchases and refinancing operations, and the imposition of risk weights and reserve requirements for fossil fuel lending. Other criteria included climate stress tests, mandatory climate-related disclosures, and “science-based, credible taxonomies that effectively identify “green” and “dirty” investments.”

Almost all central bank actions across all ten criteria are insufficient or grossly insufficient in aligning operations with science-based emissions pathways to climate stability, the report finds. None of the central banks studied are closely aligned with the IPCC emission pathways to the Paris Agreement targets, and only four central banks – the ECB, Banque de France, Bundesbank and Bank of England – are even partially aligned with any of the criteria.

The PBOC continues to direct large financial flows towards coal, the Fed has “worked to maintain and increase fossil fuel finance” and the ECB continues to support fossil fuel finance “despite some positive rhetoric,” the report finds. The Bank of Canada has not taken any steps to restrict fossil fuel finance, and the monetary policy and financial supervision of the Bank of Japan (BOJ) “strongly supports fossil fuel finance.” The study also examined the climate policies of the Banque de France, Bundesbank, Reserve Bank of India, Bank of Italy, Central Bank of Russia, Swiss National Bank and the Bank of England. All were found grossly inadequate to address the climate crisis.

“In their role as supervisors of commercial banks, central banks have largely failed to use the levers at their disposal to stem the flow of fossil fuel finance,” Tong concludes. “Central banks have ignored proposals to use reserves requirements or prudential regulation to this end.”

Tong recommends that governments amend central bank mandates where necessary to help manage the decline of fossil fuels, and that central banks adapt their asset management and regulatory practices to align with global efforts to avoid climate catastrophe. He also calls on civil society groups “to bring greater pressure to bear on governments and central banks to put the managed decline of fossil fuel production at the center of their climate strategies.”

The OCI study comes days before Friday’s Fed-hosted annual Jackson Hole meeting of central bankers, reduced to a one-day online event this year due to Covid-19 concerns. Despite the report’s findings, think tank and advocacy group Reclaim Finance pointed to the meeting as an opportunity for central banks to change direction and “prove worthy” of addressing the climate crisis by cutting ties with fossil fuel finance.

Central bankers may “ignore the [climate] elephant in the room to focus solely on the current context and monetary policy tweaks,” the group said in a blog post responding to the OCI report. “A few weeks after the IPCC’s AR6 report was released and a few months before the COP26, the Jackson Hole Summit could be the moment central banks confront the climate problem and start being part of the solution by steering financial flows away from fossil fuels.”