By Francesco Canepa and Virginia Furness
FRANKFURT (Reuters) – A global effort by central banks to join the fight against climate change has hit a major roadblock with the U.S. central bank’s decision to leave a club dedicated to overseeing environmental risks in finance.
The Fed said on Friday that it would leave the Network on Greening the Financial System (NGFS) because it had “expanded its scope, covering a wider range of issues that are outside the (Fed’s) statutory mandate.”
Launched in 2017, the global body of central banks and regulators has mostly produced reports, including climate scenarios, that supervisors use when assessing the effects of climate change on the economy and financial sector.
Coming just before the inauguration of Donald Trump as US president and amid a backlash against climate action on Wall Street, the Fed’s move was widely interpreted as a sign that the political climate has become less friendly to environmentalism.
“The financial consequences of climate change are growing — and the most important central bank is yielding to the changing political winds,” said Guntram Wolff, professor of economics at Solvay (EBR:) School of Brussels, part of the University of Brussels.
The NGFS remains “more determined, more committed and more enthusiastic than ever,” it said in a statement, adding that the Fed was not a member of its board of directors.
Without the Fed, the largest and most influential of the 143 members of the Paris-based NGFS is the European Central Bank.
Under President Christine Lagarde, she has included climate change in both her monetary policy, through a short-term change in bond purchases, and in her work as supervisor of leading banks in the 20 eurozone countries.
CRITICS
But some European politicians, and even one central banker, have criticized the ECB’s climate activist stance.
Such skeptical voices may now be emboldened by the Fed’s decision to abandon the NGFS, said Stanislas Jourdan of the Sustainable Finance Lab think tank.
“This Fed news should wake up political forces for a green transition in Europe to support the ECB’s climate efforts,” Jourdan said. “With more political support, we could double down with more proactive policies like the green interest rate.”
Such an initiative would see commercial lenders financing environmental projects charge less to borrow from the ECB.
The ECB’s actions so far have had only a minimal impact on borrowing costs. Research by its own staff found that between 2018 and 2022, the eurozone’s most polluting companies paid an average of just 14 basis points (0.14 percentage points) more to borrow than their cleanest peers.
An academic paper published in 2023, commissioned by the European Parliament, found that the ECB has only a “limited role” in the fight against climate change and that supporting the green transition could conflict with its duty to control inflation.
And a draft report approved last week by parliament’s economic affairs committee, which oversees the ECB, welcomed its climate-focused bank stress tests but said it should remain “as apolitical as possible” when conducting monetary policy.
But James Vaccaro, head of the Climate Safe Lending Network and CEO of sustainable business consultancy Re: Pattern, said the ECB should continue to lead on green issues.
“There is no logical reason for (the ECB) to withdraw. (Managing climate risk) is crucial for Europe’s economy and financial stability,” Vaccaro said.
