Written by Francesco Canepa and Virginia Furness
FRANKFURT (Reuters) – Global efforts by central banks to join the fight against climate change have hit a major hurdle with the Federal Reserve's decision to leave a club dedicated to monitoring environmental risks in finance.
The Fed said on Friday that it would withdraw from the Network on Greening the Financial System (NGFS) because it had “expanded its scope, covering a broader range of issues that fall outside the scope of (the Fed's) statutory mandate.”
The global body of central banks and regulators was launched in 2017 and has mostly produced reports, including climate scenarios that supervisors use when estimating the impacts of climate change on the economy and financial sector.
The Fed's move came before Donald Trump's inauguration as US president and amid a backlash against climate action on Wall Street, and was widely interpreted as a sign that the political climate was becoming less environmentally friendly.
“The financial consequences of climate change are growing — and the most important central bank is capitulating to the changing political winds,” said Guntram Wolf, an economics professor at Harvard University. Solvay (EBR:) Brussels School, part of the University of Brussels.
The NGFS remains “more determined, committed and enthusiastic than ever,” it said in a statement, adding that the Fed was not a member of its steering committee.
Without the Fed, the largest and most influential bank among the 143 members of the Paris-based NGFS is the European Central Bank.
Under President Christine Lagarde, she has incorporated climate change into her monetary policy, through short-term adjustment of her bond purchases, and in her work as supervisor of the euro zone's 20 largest banks.
Critics
But the ECB's climate activist stance has been criticized by some European politicians and even one of the central bank's governors.
Such skeptical voices may now be encouraged by the Fed's decision to leave the NGFS, said Stanislas Jordan of the Sustainable Finance Laboratory think tank.
“This news about the Fed should awaken political forces in favor of a green transition in Europe to support the ECB’s climate efforts,” Jordan said. “With more political support, we can redouble our efforts with more proactive policies such as a green interest rate.”
Such an initiative would see commercial lenders financing environmental projects charge lower fees for borrowing from the ECB.
The measures taken by the European Central Bank so far have had only a minimal impact on borrowing costs. A study by its staff found that between 2018 and 2022, the most polluting companies in the euro zone paid on average just 14 basis points (0.14 percentage points) more to borrow than their cleaner counterparts.
An academic study published in 2023 and commissioned by the European Parliament found that the ECB has only a “limited role” to play in combating climate change and that supporting the green transition may conflict with its duty to control inflation.
A draft report approved by Parliament's Economic Affairs Committee, which oversees the European Central Bank, last week welcomed climate-focused stress tests for banks, but said they should remain “as apolitical as possible” when managing monetary policy.
But James Vaccaro, president of the Climate Secure Lending Network and CEO of sustainable business consultancy Re:Pattern, said the ECB must continue to lead on green issues.
“There is no logical reason for (the European Central Bank) to back down. (Managing climate risks) is critical to the European economy and financial stability,” Vaccaro said.
