By Francesco Canepa and Virginia Furness
FRANKFURT (Reuters) – A global effort by central banks to join the fight against climate change has been hit with a major setback with the US Federal Reserve's decision to leave the club dedicated to policing the risks of the financial environment.
The Fed said on Friday it would abandon the Network for Greening the Financial System (NGFS) because it was “broadly expanded, covering a wide range of issues outside of (the Fed's) statutory authority.”
Launched in 2017, the global body of central banks and regulators have produced several reports, including climate scenarios used by managers when predicting the effects of climate change on the economy and the financial sector.
Coming just before the inauguration of Donald Trump as US President and amid a backlash against the climate on Wall Street, the Fed's move was widely interpreted as a sign that the political climate has become less friendly to the environment.
“The financial consequences of climate change are growing – and the most important bank is offering to change the political climate,” said Guntram Wolff, professor of economics. Solvay (EBR:) School of Brussels, part of the University of Brussels.
The NGFS remains “more resolved, committed and interested than ever”, it said in a statement, adding that the Fed had never been a member of the steering committee.
Besides the Fed, the largest and most powerful of the 143 members of the Paris-based NGFS is the European Central Bank.
Under President Christine Lagarde, he has included climate change both in monetary policy, through a short-term tweak in bond purchases, and in his role as head of the top banks of the euro 20 countries.
THE CRITICS
But the ECB's climate activism has been criticized by some European politicians and the central banker.
Such skeptical voices may now be reinforced by the Fed's decision to abandon the NGFS, said Stanislas Jourdan of the Sustainable Finance Lab think tank.
“This news about the Fed should awaken political power in favor of green change in Europe to support the ECB's climate initiative,” said Jourdan. “With more political support, we can double down on effective policies like green interest.”
Such a move would see commercial lenders financing environmental projects charged less to borrow from the ECB.
The ECB's actions so far have had little impact on borrowing costs. A study by its staff found that between 2018 and 2022, the euro zone's most polluting industries paid an average of just 14 percentage points (0.14 percentage points) more to borrow than their cleanest peers.
An academic paper published in 2023 and authorized by the European Parliament found that the ECB has “a small role” to play in the fight against climate change and that supporting the green transition could conflict with its task of controlling inflation.
And a draft report approved last week by Parliament's economic affairs committee, which oversees the ECB, welcomed its assessment of the bank's climate 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 rational reason for (the ECB) to go back. (Managing climate risk) is very important for the European economy and financial stability,” said Vaccaro.