Christine Lagarde: Central banks cannot get ‘a pass’ on climate change

Report finds green policy options come with costly drawbacks

European Central Bank president Christine Lagarde said innovation comes with a trade-off, with questions around how to manage the transition to new technologies to ensure they do not become a burden on the environment. ReutersShow less

Central banks cannot ‘get a pass’ on climate change after the pandemic created a sense of urgency over innovation in the financial system to ensure a green future, European Central Bank President Christine Lagarde said.

Speaking at the Innovation Summit hosted by the Bank for International Settlements, Ms Lagarde said innovation is part of central bankers' DNA, something demonstrated by the handling of the 2008-09 financial crisis and the fallout from the coronavirus pandemic, with those skills easily transferable to climate change.

“[Climate change] is not the primary responsibility of central banks, but equally I don't think that anybody can get a pass on climate change,” Ms Lagarde said.

“Central bankers can perfectly well apply that innovation [and] spirit that they have demonstrated in the instruments that they've used [in the past] in other matters, such as climate change, biodiversity and protection of the environment.”

Ms Lagarde’s call for action came a day after a new report from the Network for Greening the Financial System (NGFS) found that while central banks need to fight climate change, all policy options come with costly drawbacks, so steps need to be gradual and cautious.

With climate change posing a growing risk to financial stability, central banks are examining their own role in driving a transformation.

Options being studied include skewing asset purchases to benefit green issuers or to punish energy-intensive firms and curtailing the availability of central bank funding to polluters.

However, the report from NGFS, a group whose 89 members include the US Federal Reserve, the ECB and the Bank of Japan, took a cautious view. It found that all options either hinder monetary policy effectiveness, increase risk or run into operational feasibility constraints.

Ms Lagarde said on Thursday that Europe is pushing for “smart green growth” with simple innovations, such as smart thermostats that reduce energy bills in the building and construction sectors.

“Clearly, there are synergies and very strong synergies between this sustainable future and innovation,” she said.

However, innovation comes with a trade-off, she said, with questions around how to manage the transition to new technologies to ensure they, in turn, do not become a burden on the environment.

“What we do with solid solar panels when they come to the end of their life 20 years after being installed is still very much unknown,” Ms Lagarde said.

“What we do with batteries, which have run for 10 years to support our electric cars, is still very much unknown. And the environmental footprint of cryptocurrencies – much celebrated at the moment – is also something that is on the downside of those innovations.”

Mark Carney, the UN's special envoy on climate action, said the financial system increasingly focuses on the risks of climate change, but it should not forget the “enormous opportunities from solving what is ultimately an existential crisis”.

“A lot of value will be created,” Mr Carney, formerly the head of the Bank of England, told the BIS Innovation Summit.

There has been some disagreement among central bankers about how far they should go to tackle climate change. While Ms Lagarde has advocated central bank action, the Federal Reserve has been more cautious in the past.

However, Ms Lagarde said 'the signalling effect' of the new US administration re-joining the Paris climate agreement shortly after Joe Biden took office has been phenomenal.

“Almost instantly, within a matter of a couple of days, we saw the US Treasury change tack in respect of many topics, including in particular climate change. Janet Yellen has made climate change one of the major issues that she is going to embrace and tackle,” Ms Lagarde said.

During his presidency, Donald Trump pulled the US out of the Paris climate agreement, which came into force in 2016 and united nearly 200 countries in a global pact to tackle climate change, with a pledge to limit the rise in global temperatures to under 1.5°C.

Ms Lagarde said having the US back on board brings “the power of the first and largest economy in the world behind an objective that we all share”.

“My hope is that, by having the US back in the game, we can foster a move towards a better standardisation, in particular in relation to disclosure. That's a push that results simply from all the players being at the table. I put that as priority number one," she said.

On Wednesday, Sweden's central bank emphasised the risk of failing to act, arguing that climate change could lead to lower growth and inflation volatility.

“If climate change increases the risk of catastrophe, makes economic developments more uncertain and worsens growth prospects, it may lead to a lower long-term real interest rate,” the Riksbank said.

Because it may be difficult to calculate the climate impact of investments, Wednesday's NGFS report suggested policymakers could initially adopt simple, non-numerical rules, such as promoting investments hosted in countries that adopt climate treaties.