Mark Carney is no stranger to accusations that he is exceeding his remit, especially on Brexit, where the Bank of England governor has been regularly criticised for warning about the dire consequences of a hard break with the EU.
Another area where Mr Carney has gone further than financial supervisors in other jurisdictions is climate change, which many economists believe could pose a greater risk to the financial system than Brexit.
During a recent interview, Mr Carney bristled at suggestions he was overstepping the mark by asking banks to do more to model climate risks, from the impact of floods on their mortgage books to whether new green policies could hurt the creditworthiness of their corporate clients.
“Absolutely not,” he replied when asked whether the BoE’s work on climate change was an example of mission creep. “The issues around climate are wide ranging, and will touch virtually every sector.”
Mr Carney said banks were already thinking about the issue, referencing a recent BoE survey of UK lenders, which found seven out of 10 were treating climate change as a financial risk rather than a reputational one.
“They’re looking at specific climate-related risks in their portfolio, [such as] their exposure to certain bits of the auto sector,” he said. “Like it or not, this stuff is coming mainstream.”
The governor said it was not the BoE’s job to implement green policies “by the back door”, but insisted regulators had a duty to ensure financial institutions were preparing for extreme weather events and the imposition of new rules designed to meet global warming targets.
He said: “What central banks will not do . . . is substitute for governments in climate policy. That is entirely the responsibility of governments.”
In his capacity as chair of the international Financial Stability Board until last month, Mr Carney played a major role in setting up the Task Force on Climate-related Financial Disclosures (TCFD), an initiative to help companies quantify the risks so they can communicate them to investors.
Mr Carney said the TCFD, which is backed by companies responsible for nearly $100tn of assets, was a “public good” regardless of one’s opinions on climate change.
“Some people will be a climate [change] denier . . . or take a view that the speed with which domestic policy will change will lag international agreements. People can be on the other side of the spectrum as well. That’s called a market, but the market needs information.”
Most global banks have signed up to the TCFD, but five lenders went a step further last month by pledging to “progressively align” their corporate loan book with the goals of the Paris agreement, which seeks to keep global warming to well below 2C.
ING, BBVA, BNP Paribas, Société Générale and Standard Chartered all said they would explore ways to make lending decisions that helped to achieve the Paris goal.
Ralph Hamers, chief executive of ING, said his bank would work with its clients in polluting industries, like real estate and shipping, to help them reduce their carbon footprints.
“You will see our loan book over time change,” said Mr Hamers, “In some areas where we can’t have an impact, or our clients are not open to our approach, we may even step out [of the relationship].”
Mr Hamers said that failing to realign the bank’s portfolio might mean it ended up with “stranded assets” — loans that have turned sour because the borrower has been put out of business by new climate policies. “You could be stuck with a client that doesn’t get [operating] licences any more,” he added.
Mr Hamers conceded that some banks would spot an arbitrage opportunity in lending to profitable businesses that have been frozen out by “greener” rivals: “I’m sure it will happen — there’s nothing I can do about it.”
In contrast, Daniel Klier, head of sustainable finance at HSBC, warned against cutting clients off too quickly, arguing banks can have a greater impact by working with their borrowers.
He said: “It doesn’t make sense to just divest them. We need to work with them. None of them are ‘green’ or ‘brown’. They’re on a journey.”
Although banks have long paid lip service to climate change, the industry is being forced to change by investors, according to Laurence Pessez, head of corporate social responsibility at BNP Paribas.
“There is a huge expectation from investors,” she said. “At the beginning it was mainly from [sustainable] investors, but now it’s becoming mainstream because all investors have understood there is a potential credit risk in climate.”
Most European banks shared the “common goal” of reducing their exposure to polluters, said Ms Pessez, adding that US banks had taken a “slightly different” approach for “obvious reasons” — a reference to President Donald Trump’s climate policies.
Some campaigners have called for banks to have lower capital requirements on green bonds and other forms of sustainable finance, and in January the European Commission announced it was investigating the feasibility of a “green supporting factor”.
Mr Carney poured cold water on such an idea. “The idea that we’d somehow lower the capital requirements for a green project, independent of the underlying credit quality . . . that’s not our role. If the risk is lower, then it is appropriate to have a lower capital charge — but it’s entirely on the basis of the risk.”
Still, he said he was “more open to a brown penalising factor”, but stressed that such a move was “[not] being contemplated at the moment at the Bank”.
In private, however, some senior bankers expressed scepticism about efforts to make their portfolios more green.
“We are falling into political correctness when we should be thinking about financial performance,” said one executive at a European bank.
He added: “People say we should not lend to oil companies or traditional carmakers, but if you ask me who is going to lead the energy transition, I’d say it’s Total and Volkswagen.”
Meanwhile, some campaigners warn that the welter of initiatives such as TCFD and the ING-led project should not be mistaken for concrete action.
“We cannot comfort ourselves with how many initiatives have been launched,” said Catherine Howarth, chief executive of ShareAction, a charity that promotes responsible investing.
She added: “We have to measure ourselves against hard progress towards achieving net zero by 2050. On that measure no bank is anywhere near a climate safe strategy.”
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