| By Alastair Marsh Central bank independence is about more than just interest rates. According to researchers at University of California, Berkeley, and University College London, central bank policy on climate topics is closely correlated with — and influenced by — national politics. In fact, national politics weigh more heavily than science and financial data, they found. "We find limited evidence that climate-related economic risks are associated with central bank behavior," Esther Shears, deputy chief economist at the State of California's Division of Petroleum Market Oversight, said in an interview. Shears, who co-authored the study on central bank approaches to climate risk management while a doctoral student at Berkeley, said she found that instead of considering risks such as assets losing their value in a world fundamentally altered by global warming, central bankers are more likely to focus on themes that "are significantly associated with domestic climate politics."  Jerome Powell, chairman of the US Federal Reserve Photographer: Kent Nishimura/Bloomberg It's a finding that appears to be borne out by recent developments. In the US, where the Trump administration has taken an ax to pro-climate policies, the Federal Reserve has pushed back against global efforts to have central bankers and financial supervisory authorities take climate risk into account. The Fed quit the Network of Central Banks and Supervisors for Greening the Financial System, a global coalition of central banks engaged in the study of climate risk, in January, and has in recent months stepped up pressure on the Basel Committee on Banking Supervision to water down its climate program, Bloomberg has previously reported. Chairman Jerome Powell has said the Fed doesn't have a mandate "of fostering an energy transition or dealing with climate change," and instead has "very limited" powers to ensure the institutions it supervises "are aware of and can manage" the associated risks. While the Fed's pushback against Basel's climate efforts pre-dates the re-election of Donald Trump, the 47th president's return to the White House has emboldened a Republican Party that was already attacking climate policies such as net zero. In the UK, meanwhile, where Keir Starmer's government has defended the country's net zero plans, the unit within the Bank of England that supervises banks and insurers has just told lenders to up their game on climate. The Prudential Regulation Authority said in a consultation released at the end of last month that while UK financial firms have made strides in developing climate-risk management capabilities, their progress "is uneven and more needs to be done." And in the EU, the European Central Bank has incorporated climate and nature considerations into its monetary policy and supervisory work. Though Europe is under pressure from some of its biggest member states to simplify its green regulations, its Green Deal remains intact, and the ECB has been vocal on the importance of taking the environment into account.  Christine Lagarde, president of the European Central Bank Photographer: Krisztian Bocsi/Bloomberg The development "reflects the starkly different approaches that central banks have taken to climate risk management," said Jonas Meckling, professor at the University of California, Berkeley, and climate fellow at Harvard Business School. "Yet it also highlights the importance of these international standards to get laggards such as the Federal Reserve to begin to take action." There's evidence that the "leaders in climate risk management are doubling down, raising questions if the gap between leaders and laggards is growing wider," Meckling said. Morgan Després, a former French central banker who is now the executive director for international climate finance at the European Climate Foundation, said that "some would argue that climate policies — like the green deal — created a kind of moral suasion where central bankers felt they had to do something on climate, and that now, with changing priorities of governments and society, the compulsion to work on climate has all but disappeared." "Be that as it may, many central banks are sticking with their climate work, even if it is less high profile and maybe also less ambitious than it used to be." However, central bankers are masters of nuance. In comments to the Wall Street Journal earlier this year, National Bank of Belgium Governor Pierre Wunsch said central bankers "should not be activists," while Bank of England deputy governor for financial stability Sarah Breeden recently told a Financial Times conference that the central bank should "stay in our swim lane" and not intervene in discussions of elected officials on net zero emissions policies. Reasons for caution are multifold. Aside from Trump's saber-rattling, there's also evidence that climate policies can come with a near-term economist cost. A recent discussion paper from Germany's Bundesbank on the near-term impact of the green transition on corporate loan portfolios found that potential losses are "non-negligible," and emissions-intensive firms are "exposed to significantly stronger increases" in credit risks. As part of a new stress testing framework for the German banking sector, the central bank said probabilities of default rise on average by as much as 40% for non-financial firms over a three-year horizon, according to various scenarios of how the energy transition will unfold. While the Bundesbank economists cautioned that calculating the impacts of climate change on the finance sector is relatively new discipline that remains "fraught with significant uncertainty," corporate loan impairments could be detrimental to the profitability and stability of individual banks and the broader banking sector, they said. Read and share this story with your friends and followers on Bloomberg.com. | 
