At the end of March, San Francisco’s Federal Reserve board issued an “economics letter” which argued that “in the coming decades, climate change . . . will have increasingly important effects on the US economy” that, it said, are “relevant considerations” for the central bank.
At the end of March, San Francisco’s Federal Reserve board issued an “economics letter” which argued that “in the coming decades, climate change . . . will have increasingly important effects on the US economy” that, it said, are “relevant considerations” for the central bank.
Nothing odd about that, you might think. If you live in California it is almost impossible to ignore climate issues given the devastating impact of recent wildfires (among other climate shocks). But this bland statement of the obvious conceals a startling tale of change which investors cannot afford to ignore — irrespective of their views on climate science.
Until four years ago, central bankers almost never talked about climate change. But in September 2015 Mark Carney, governor of the Bank of England, created a frisson among the tribe of (mostly) faceless financial bureaucrats by declaring that climate change had become a financial stability risk.
Some of his counterparts initially dismissed this as hippy posturing, or mission creep. But two years ago the Bank of England joined forces with the Banque de France and the People’s Bank of China (yes, really) to create the so-called Network for Greening the Financial System.
This only had eight members at launch. But last week it announced that its ranks have swelled to three dozen central banks and regulators, covering half of global gross domestic product and two-thirds of the global systemically important banks and insurers.
Indeed, the only notable holdouts now are Brazil and the US. And while nobody expects the Fed to join soon, given the Trump administration’s stance on climate issues, a rebellion is bubbling among some bureaucrats at the US central bank. Hence that blog from the San Francisco Fed, published just before the NGFS meeting in a not-so-subtle sign of support — a demonstration of the power of America’s federal structure.
Some cynics might dismiss this as mere posturing. That is understandable. When the NGFS met last week in Paris it issued a report replete with numbers explaining why they consider the climate a financial stability risk.
It noted, for example, that “worldwide economic costs from natural disasters have exceeded the 30-year average of $140bn per annum in seven of the last 10 years”, while “studies estimate that the financial value at risk could be up to 17 per cent [of global assets] depending on the mean average temperature rise”. Yikes.
However, the report also admitted that there is a fog of opacity and uncertainty about climate impact models. And while the NGFS pledged to take practical action, it is now up to three international working groups to turn this rhetorical pledge into supervisory reality. That could take years.
The NGFS report marks a green watershed. Until recently, environment finance was primarily driven by a tiny minority of conscience-plagued investors who actively wanted to “do good” in the world. Think, say, of those earnest Swedish pension funds.
But the crucial point that investors and policymakers need to understand is that this movement is now driven by a fear about the costs of “doing bad” — risk management, in other words. More specifically, now that central banks have said the issue is linked to financial stability, no executive can ignore this without facing the risk of shareholder suits.
And if, or when, financial regulators start incorporating these issues into stress tests, the risk management issue will arise. Mr Carney says this could start in a couple of years.
One consequence of this will be a frenetic scramble to expand the nascent systems for green accounting, measurement and advice. Another will be the movement (or relabelling) of trillions of dollars of capital. JPMorgan calculates that some $23tn of assets in global markets is already managed according to some element of so-called environmental, social and governance principles, dramatically more than a decade ago. That could easily double or triple in the next decade.
Now, this change will not be as dramatic as green activists would like. Nor will it be as headline grabbing as the Extinction Rebellion protests in London and Paris. This is a quiet revolution.
But in the long-run I would bet that last week’s move by the NGFS will have far more impact on the world than any protest. Activists do not always turn up wearing tie-dye and throwing stones. Sometimes they wear boring suits and use dull central bank blogs as their weapon of choice. Grey can also be green.
