2021: plenty of climate talks, but little practical progress

The climate and ecological crises continued to accelerate in 2021 as economic activity and associated greenhouse gas emissions rebounded from the previous year’s pandemic-related dip to reach near-record levels. Despite this, banks, central banks and governments have continued to invest in industries which are driving global heating.

Warnings from the International Energy Agency that new fossil fuel developments must end in 2021 to meet Paris Agreement targets were largely ignored, as coal-fueled electricity generation jumped 9% from last year to reach a new high.

The consequences of these choices were apparent in the increased number and intensity of floods, wildfires, droughts and other extreme weather events around the world during the year, as well as in scientific research warning of much worse to come. Studies released in 2021 showed the Amazon rainforest becoming a net emitter of CO2, Atlantic ocean currents weakening, and Antarctica’s vast Thwaites glacier on the verge of collapse – an event that would lock in over half a meter of sea level rise and flood coastal cities everywhere.

The response of central banks and financial regulators to this global emergency also accelerated during 2021, albeit from a very low base focused largely on climate risk disclosure.

Green central banking goes mainstream

The year began with the launch of a new climate change centre at the European Central Bank (ECB), a new climate committee at the Federal Reserve and a new green finance strategy from the People’s Bank of China. Asian central banks agreed on a new sustainable banking agenda, the Banco Central do Brasil introduced climate criteria into financial regulation, and the Bank of England got a new green mandate.

However it was the Green Swan Conference in June that put climate change firmly on the agenda of central banking. Jointly organised by the Network for Greening the Financial System (NGFS) and the Bank for International Settlements, the event was the first high-level gathering of central bankers and financial regulators focusing specifically on climate change and its threat to economic, financial and price stability. Momentum from the conference continued through the remainder of the year, culminating in coordinated commitments from central banks around the world at November’s Cop26.

An end to market neutrality

There was an end to the controversial concept of so-called market neutrality as a reason to avoid introducing climate criteria into monetary policy. As evidence of carbon bias in central bank asset purchases mounted and climate protestors targeted central banks, this defense of business as usual became increasingly untenable.

The end came during the Green Swan Conference when Bundesbank president and leading market neutrality advocate Jens Weidmann dramatically reversed his position. By the end of the year, even Fed chair Jerome Powell had acknowledged a role for climate considerations in monetary policy, albeit in the long run.

Growing evidence of threats to stability

The year also saw mounting evidence of climatic effects on price stability, the core mandate of most central banks. Both the Banco de Mexico and Banco Central do Brasil identified ongoing droughts as an inflation risk behind interest rate hikes, while research from thinktanks, academia and central banks found significant potential inflationary effects from climate-related events and mitigation policies.

Evidence of climate-related threats to economic and financial stability also mounted, with warnings of a ‘climate Lehman moment’ as carbon assets become stranded and climate-related defaults grow. Fossil fuels as the ‘new sub-primes’’ was also a theme continued in assessments of the climate-related financial risks facing European and American banks. “Fossil assets represent only the tip of a gigantic iceberg representing all sectors requiring a transition – aeronautics, automotive, petrochemicals, etc,” read one study. “Therefore, we cannot rule out a snowball effect, triggering a major crisis.”

Nature-related risks

Central banks and regulators began moving beyond climate change to recognise the growing economic and financial effects of the collapse of Earth’s biodiversity.

Following a ECB report in July showing that 70% of its corporate holdings damage biodiversity, the NGFS called on central banks to support governments on biodiversity loss. In an effort to help central banks and other organisations report and act on nature-related risks, the Taskforce on Nature-related Financial Disclosures was launched, modeled after the Taskforce on Climate-related Financial Disclosures.

Civil society accountability

The growing focus during 2021 of central banks and financial regulators on climate-related threats and responsibilities was helped by a dramatic expansion of civil society oversight with associated transparency and accountability. Along with the launch of this website,  the Green Central Banking Scorecard ranked central banks and regulators on their climate-related activities. Following an update in October, the scorecard put France, Brazil and China in the top three positions but found that policymakers remain stuck in discussion and data-gathering exercises, with no high impact emissions or biodiversity policies implemented by any G20 monetary or prudential authority.

A new interactive tool tracking climate-related monetary and financial policies in 30 countries was also launched by the E-axes Forum, an independent research organisation focusing on macroeconomic policies and sustainability. The tracker shares policy developments from central banks and financial regulators in real time and is accompanied by a second tracker following emerging academic literature on climate change, macroeconomics and finance.

Further accountability was provided by the Green Finance Measures Database which identified 128 green finance regulations implemented globally in 2021, while the WWF launched a new framework for assessing sustainable financial regulations and central bank activities accompanied by its own tracker website. WWF’s assessment found a growing number of central banks and supervisors starting to implement climate-related regulations, supervisory expectations and guidelines, but warned that current efforts are still falling far short of what is needed to seriously align the financial system with sustainability.

Protests and proposals

Partly as a result of these efforts, public awareness of the role of central banks and regulators in funding and supporting fossil fuels also increased during 2021. Central banks in many countries saw climate protests outside their doors, often held by young people demanding real and effective action to protect their futures.

Climate advocates, academics and campaigning groups also published a stream of proposals, letters, petitions and other demands for concrete action. These included  calls for ‘one-for-one’ bank capital requirements, climate risk buffers, targeted green lending and the elimination of fossil fuel and high emission assets from corporate purchase programmes.

More generally, activists demanded that central banks recognise the double materiality of the financial system’s impact on climate change, adopt the precautionary principle in the face of the vast scale and uncertainties involved in climate change, and go beyond climate risk to actively support the transition away from carbon.

Federal Reserve lags behind

As the year drew to a close, the Federal Reserve and US financial regulators stood out among their international peers for their slow recognition of the climate emergency and its profound threats to economic and financial stability.

Mired in climate denial, avoidance and partisan politics after four years of the Trump administration, US authorities are just beginning to respond to the climate challenge. However, they remain focused only on climate risk with almost no indication of actions to mitigate the unfolding crisis. The controversial reappointment of Jerome Powell as Fed chair further dampened hopes for a meaningful US response.

Time is running out

According to the Intergovernmental Panel on Climate Change there are just eight years left to cut global greenhouse gas emissions in half and meet the science-based Paris Agreement targets to avoid dangerous global heating. However, no monetary or financial authority is close to adequately addressing the vast flow of money funding the climate emergency.

While 2021 was the year that climate and environmental considerations became accepted as a responsibility for central banks and financial regulators, the vast majority of activity was confined to discussions, plans, reports and intentions, mostly concerned only with identifying and disclosing climate-related risk. Yet there was little evidence of actual reductions in funding the emissions that threaten economic and environmental stability.