U.S. Federal Reserve to join sustainability club

Chart of the week

Network for Greening the Financial System will come to include central banks and regulators from sixty countries

The U.S. has been notably absent when it comes to sustainability initiatives and networks established over the past few years. But this seems to be changing.  Last week, U.S. Federal Reserve (Fed) board member Randal Quarles stated that the U.S. central bank had submitted a request to join the Network for Greening the Financial System (NGFS). As well, the Fed’s latest Financial Stability Report for the first time recognized climate change as a systemic threat.[1]

The NGFS was established in December 2017 with just eight central banks and supervisors as founding members. Two of the network’s aims are to assist in the development of climate-risk management in the financial sector and to mobilize financial flows to support the transition to a sustainable economy. Three years later, the club has grown to a community of central banks from across 60 countries[2] ranging from the small (Seychelles) to the large (China) and which combined represent 58% of global output, as our Chart of the Week depicts. 

When the U.S. Federal Reserve joins, likely before the NGFS’s next annual meeting in April 2021, the club will be given even more clout spanning not just five continents, but also representing an estimated 74% of global gross domestic product (GDP) and two-thirds of global greenhouse-gas emissions. This membership application therefore heralds a new dawn as the U.S. comes in from the cold and joins or re-joins many networks and commitments.  

The involvement of central banks in sustainability has also played a crucial role in the lead-up to the Paris Climate Agreement in 2015. Since then, some of the actions of the club of central banks has included publishing[3]:

  • a research agenda on the macroeconomic and financial-stability impacts of climate change,
  • initial findings regarding the link between climate change and monetary policy,
  • a statement that calls for governments to focus on a green economic recovery from covid-19,
  • guidance for how supervisors should integrate climate and environmental risks into prudential supervision,
  • a set of central climate scenarios
  • guidance for how central banks’ own portfolio management can integrate sustainable and responsible investing.

Michael Lewis, Head of ESG Thematic Research at DWS: “The involvement of the Fed is sure to accelerate central banks’ efforts to integrate climate risks into financial-stability monitoring and supervision, integrate sustainability into their own portfolio management, address data gaps and build awareness and intellectual capacity on climate risks and opportunities. We are also likely to see more efforts to create robust and internationally consistent environmental and social disclosure and taxonomies of sustainable economic activities. This should also help institutional investors to better align their funds with reliable sustainability goals, placing them on track to eventually stamp out greenwashing for good.”

20201120_CotW_NGFS_CHART_EN_72DPI.png

Sources: NGFS as of 11/2020, IMF World Economic database as of 10/2020, measured in USD PPP current prices

1. https://www.federalreserve.gov/publications/files/financial-stability-report-20201109.pdf

2. https://www.ngfs.net/en/about-us/membership

3. https://www.ngfs.net/en/liste-chronologique/ngfs-publications

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