Tuesday 30 March 2021

You Had One Job

The Economist questions the expansion of central bank remits to cover rather more than price stability and prudential bank regulation. 

As all this has occurred, both governments and central bankers have also taken a more expansive view of the latter’s mission. Many central banks were handed new financial-stability responsibilities after the financial crisis. Now another rethink seems to be under way. Last month the Reserve Bank of New Zealand was instructed by the government to take account of house prices when setting monetary policy. Some monetary officials are paying more attention to inequality and the welfare of marginal workers. The Fed recently revised its policy framework, partly in recognition of the fact that premature tightening tends to impose disproportionate harm on black and Latino workers. Climate change has become a hot topic. In January Ms Lagarde said the ecb was assessing how it might contribute to European climate goals. Mark Carney, a former governor of the Bank of England, was also vocal on the matter of climate change. As a consequence of Mr Sunak’s announcement, the bank will adjust its corporate-bond-purchase scheme so as not to subsidise firms with large climate footprints.

Some of this new expansion of horizons is defensible. Where climate change poses financial-stability risks (by threatening systemically important insurers, say) central banks are right to take note. Had the Fed worried more about joblessness early in the 2010s it might have been less eager to tighten monetary policy—and more likely to hit its inflation target. But, where they were once granted independence because governments could not help but inflate, central banks now plead for more government spending to help reflate depressed economies. Meanwhile, central banks’ insulation from politics makes them a convenient place to delegate jobs that elected officials would rather not handle. Politicians seem as though they’re ducking their responsibilities—and, in the process, make central banks seem like political actors. The ambiguous and occasionally conflicting nature of tacked-on goals encourages a view of central bankers as multi-tasking dilettantes, rather than stolid guardians of the currency.

I worry that RBNZ is going rather beyond checking that banks and insurers don't fall over if carbon prices or sea levels rise. 

From RBNZ's submission to the Climate Change Commission: 

There's suggestion the Commission should make recommendations around re-engineering financial systems to ensure that finance is available for green projects:

Given the importance of finance and investment as an enabler of change, and the interlinked nature of policy and investment flows, it may be beneficial to draw together these threads in a discrete chapter (or expand the current section 6). 

This could include the quantum of investment required, the environment required to facilitate these investments and the interplay between the economy, investment/finance and policy (mutually reinforcing or at odds). It could review the efficacy/efficiency/equity of different investment/financial instruments (e.g. subsidies, government bonds, ETS) in particular contexts. It could also highlight the risks to the broader economy/finance system should finance flows fail to be redirected in a timely manner or New Zealand fail to meet its international targets.

There's pushes for disclosures regimes that seem less about making sure that investors know about potential balance sheet risks if carbon prices rise, and more about enabling activist investors to target and punish companies that aren't hewing to net-zero financed emissions. Remember that if you're in a place with an ETS that's targeting Net Zero, financing emissions doesn't increase emissions. 

Despite these challenges, in our view further disclosure regarding financed emissions makes sense. It would help identify transition risks in the economy and is in step with demands from investors who increasingly see climate risk as investment risk.15 For example, Climate Action 100+, a group of over 500 institutional investors controlling over $47 trillion of assets, is demanding that the world’s 161 highest emitting companies (representing 80% of industrial emissions) publish strategies to reduce emissions by 45% by 2030 and to reach net zero by 2050. Internationally, there is significant momentum in large financial institutions pledging to reach netzero financed emissions by 205016 including Barclays, Morgan Stanley, HSBC and JPMorgan Chase.17

They also suggest tax breaks or subsidies for green bonds - again, remember we have an ETS.

New Zealand’s market for green bonds may continue to grow organically but it is difficult to see how this would happen at the scale or pace required. Some form of intervention may be required to grow capital markets to attract green investment, beyond investor preference. This could be in various forms of incentives or disincentives such as tax breaks, guaranteed backing or liquidity provisions. However, any intervention would need to be weighed carefully to avoid unintended consequences such as the risk of crowding out other investments or fund raising capabilities.
Adding a 'with regard to the effect on house prices' into the RBNZ's mandate on monetary policy seems rather small in comparison.

Imagine, if you will, an incoming government that shares a commitment to net zero, but does not share the Climate Commission's dirigiste preferences, endorsed by RBNZ, and that thinks central banks should focus on core business. That government would clash immediately with the current Governor on matters unrelated to monetary policy. Interesting times. 

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