A few year ago I attended one of Amundi’s excellent investment forums in Paris and was astonished when the governor of the bank of France declared they might not accept fossil fuel bonds as collateral in the future. Um, I thought since when has climate change become part of the explicit policy mix of central banks ? That said this was and is France, so one shouldn’t be too surprised if there is some new diktat.
But as an excellent blog by John Cochrane of the Hoover Institution – otherwise known as the Grumpy Economist – explains (HERE), European central bankers are now knee deep in the idea that central banks must play a vital role in shaping the ‘climate emergency’ as some call it. Like Cochrane, I have no problem with stepping up the fight against climate change and I would go further than his own preferred policy tool – a carbon tax – and suggest that coordinated state intervention is needed, possibly via some form of Green new deal alongside stricter emissions regulations.
Cochrane’s beef, and mine in Paris, is nicely summarised as follows by Cochrane : “The question is whether the ECB, other central banks, and international institutions such as the IMF, BIS, and OECD should appoint themselves to take on climate policy, or other important social, environmental or political causes, without a clear mandate to do so from politically accountable leaders.”
Supporters of central bank activism will say that the fossil fuel business is at risk of extinction and I would agree with that there is some risk, though I think it very small in practical terms. Thus, central banks and thus by default commercial banks need to be alive to default risk. But I think it very unlikely that default risk is a serious systemic one for at least a decade or so. And if it is then presumably central bankers can take a balanced, case by case approach to analysing the risk level at the company level. To say that in effect ‘thou shall not lend to fossil fuel companies’ is an astonishing leap in central bank activism.
And we as investors should be very concerned by such leaps. Central banks do need to take a more activist approach to their mission. I have some sympathy for ideas around a people’s QE and helicopter money drops in an emergency maybe via emoney accounts. We can have a debate around the effectiveness of said actions but they are indisputably within their central core competence of managing economic stability. Equally encouraging the central banks to have a more regionally sensitive approach to policy outcomes- as Labour suggested last election – is also smack bang in the middle of their core competence. One could even argue that at a stretch encouraging the issuance of Green bonds is a part of improving investor choice and allowing for capital investment (though I have my doubts here).
But very active climate change policies around divestment is NOT in any core competence I have always understood for central bankers. It is a political decision, no less , no more. And governments should be held accountable for those policy decisions. That is how a democracy works. We vest accountability into institutions we can vote out while leaving technical competence and skills to unelected organisations who carry out a small subset of defined policy outcomes.
Arguably though I am taking a naïve approach to the slow march through institutions of the New left (which incorporates, sadly, a large slice of the Green movement). This amorphous lobby realised a long time ago that many of their more extreme policies would never get any traction with the electorate, so they changed tack. One tactic was to argue for economic democracy. If we all agree that democracy is a good thing, then what is so wrong with more economic democracy? We should all have more control over everything from central banks to private property rights. More equality will be the outcome, presumably.
It sounds fair and sensible until you realise that in effect a bunch of activists can hijack someone’s else process or property. We should not allow central banks to be hijacked by a smart, well educated bunch of activists to achieve their objectives by the back door. If you want a more aggressive set of Green policies then presumably vote Green, Labour or Liberal Democrat. Do not corrupt the essential nonpartisan, non-ideological institutions of state. But that is of course exactly what the New Left want to do. Everything is politics and power, nothing is exempt and if your party cannot win power via elections, use the back door of policy and elites who agree with you.
The risk here is obvious, even to those of us who regard ourselves as centre left. People we don’t like grab control of institutions we have weakened and then enact their own policies we really don’t like. In the US, the liberal left is now realising that trying to use the Supreme Court to mould policy – over say abortion which is surely an issue for political discussion – simply encourages your opponent to get smart and use those institutions against you. To their credit the Democrats are at least fighting the good fight on new Green policies in the general election. They are not hiding them, they are shouting about them. Good on them and I hope it achieves the desired result but please leave central bankers out of this debate.