The past week has been Kristalina Georgieva’s “debut” party: as the newly installed managing director of the IMF, she has presided over her inaugural annual meeting of the fund which concludes on Sunday (Monday AEDT).
As she moved around Washington, investors should have noted one intriguing detail: the first public panel she chose to participate in did not focus on the economic outlook or IMF reform programs.
Instead, she headlined the event “Can Central Banks Fight Climate Change?”, where she not only called on central bankers to act, but announced that the IMF “is gearing up very rapidly to integrate climate risks into our surveillance work”.
A cynic might be tempted to dismiss this as a public relations stunt. After all, central bankers never used to think that their mandate covered environmental issues. And the IMF’s staff sometimes joke that the institution should be called, “It’s Mostly Fiscal”, given its past policy stance.
But Ms Georgieva’s move is actually a sign of a subtle but striking paradigm shift. Since 2017, 46 central banks and regulators have joined the Network for Greening the Financial System, launched by Mark Carney, Bank of England governor, with counterparts in France and China among others.
Thus far, this group has kept a low(ish) profile, partly because the US Federal Reserve has remained aloof. But, last month, the New York state financial regulator joined. I would bet that the Fed will soon become at least an “observer” too. As its ranks swell, the NGFS is catalysing a debate among central banks about what to do next.
There are already two broad areas of agreement, Ms Georgieva says. One is that central banks will increasingly need to factor climate change considerations into their economic forecasts and monetary policy. “Already weather shocks are a source of volatility,” Philip Lane, chief economist of the European Central Bank, told the IMF gathering.
Second, regulators are now determined to ensure that the private sector is preparing for climate change shocks. This includes the direct impact from environmental changes (say, if rising sea levels affect mortgages in coastal areas), and indirect shocks (if, for example, climate policy changes create “stranded” or worthless assets on investor balance sheets.) “Today there are at least $US12 trillion ($17.5 trillion) of high carbon-emitting assets that could be stranded assets,” Ms Georgieva said. “How do you stress test [banks] for [these] risks?”
But there is also a lively debate under way over three more questions, where there is less agreement.
Should a framework for reporting climate change risks become mandatory for banks, insurance companies and asset managers? Should central banks try to change financial flows and investor behaviour by introducing tiered capital charges for assets, depending on whether they are “green” or “brown”? And should central banks use their own balance sheets to promote green policies by refusing to hold brown assets and investing in green ones instead?
I doubt whether these three ideas will deliver tangible policy measures soon, though. One practical impediment is continued disagreement about how to define what is green or brown: many economic activities lie on an “olive” spectrum since the environmental impact is mixed and changing.
Meanwhile, central bankers are deeply unsure whether they have any mandate to do more than simply react to climate change issues by modelling the financial stability risks.
“Central banks do have to deal with the risks of climate but they cannot substitute for climate policy [from politicians],” Sabine Mauderer, a board member of the Bundesbank, told the IMF event. And Signe Krogstrup, assistant governor of the Danish central bank, said on another panel: “There are calls for central banks to do more, but there is a big grey zone where central banks are not sure what fits in the mandate.”
While it could take years for these issues to play out, investors need to understand that the debate is moving. And history shows that changes in the policy paradigm often begin with seemingly outlandish concepts emerging at conferences – and only become mainstream years later, amid a crisis. Think of the trajectory of once novel ideas like inflation targeting or the risk-weighting system for bank capital.
So it would pay to keep a close eye on what Ms Georgieva does next with this debate. Better still, watch her predecessor Christine Lagarde, as she starts her new role as president of the European Central Bank. Mr Carney might have launched the NGFS; but the ECB could soon become ground zero for testing these novel ideas.
Source: The Australian Financial Review
