When I came to Germany in 1989, I asked my bank about ethical funds — those that avoided companies that produced weapons, cigarettes or nuclear power. I was met with blank faces. Today, discussions of “ESG” standards — environmental, social and (corporate) governance — are everywhere.
Asset managers are under pressure to take action on green issues — disinvesting from companies with poor environmental records, encouraging CEOs to up their environmental games and actively investing in environmentally friendly firms.
At the same time, many governments — including those in France, Poland and the Netherlands — have issued “green sovereign bonds” to finance projects for public transport and renewable energy.
There have also been calls for “green central banking” — the idea that central banks should pay more attention to the environment. Christine Lagarde, the new president of the European Central Bank (ECB), has described the issue of climate change as “mission critical”.
One uncontroversial proposal is that central banks should monitor risks to individual financial institutions and the financial system — either from natural disasters such as fires or flooding (for example, from insurance claims) or from the impact of government policies (such as carbon taxes) on share prices.
More controversial is the proposal that central banks should promote green policies through “green quantitative easing (QE)”. This would mean that, when buying corporate bonds as part of their strategy of managing interest rates, central banks would avoid the “brown bonds” of environmentally destructive firms and buy the “green bonds” of environmentally friendly firms. (A more radical version of “green QE” would be for central banks to create large quantities of new money and invest it directly in green projects.)
One problem is the definition of “environmentally friendly”. Particularly problematic are “transition bonds”, issued by companies with poor environmental records that want to clean up their act, for example by reducing their carbon emissions. Environmental campaigners see the danger of “greenwashing”, with firms using the green label to improve their image.
Opponents of central bank green activism argue that only governments have the democratic mandate to pursue environmental aims. But the pressure for action — on asset managers, governments and central banks — is only likely to increase.