Not often does a central banker get called a “rock star” but that is among the accolades frequently cited in introductions to Mark Carney, the former Governor of the Bank of England (2013 – 2020). The BBC was no exception and recited the ‘rock star’ moniker in introducing Carney for the prestigious Reith Lecture last week. Posing the ‘triple threat’ of credit, Covid and climate, the lecture starts off reminding its audience that there is always a ‘moral dimension’ to doing business. Given the existential threats of climate change and Covid-19, central banks as the supervisors of credit need to “give shareholders the ammunition they need to impose their moral sentiments on the managers of their assets”.
One would think that the appropriateness of the image of a central banker as a ‘rock star’ is the least of our worries in a world beset by the Covid-19 restrictions and widespread economic carnage. But will Carney ‘rock’ the world’s central banks into abandoning their narrow mandate to ensure financial stability by managing liquidity and interest rates? Are we on the cusp of seeing central banks wade into the murky politics of ESG (environment, social and governance criteria), CSR (corporate social responsibility) and stakeholder capitalism?
Those of us above a certain age were brought up with the rather droll image of central bankers as those whose job was to “take away the punch bowl just when the party gets going’”. The narrow mandate for central banks was to avert financial crisis and achieve price stability by utilizing its tools of credit creation and interest rate guidance. But Carney has far larger – indeed, planetary — concerns in mind. Appointed UN special envoy for climate action and finance in December last year, he is ‘signed up’ to galvanize action among financial institutions in the lead up to the global climate talks due to take place in Glasgow in November 2021.
Carney tells us that it is time to abandon the laissez faire ideologues of right wing think tanks, and enlist the central banks to join the ‘fight against climate change’. The great founder of classical political economy Adam Smith, Carney points out, was also the author of The Theory of Moral Sentiments and not just the The Wealth of Nations. In Carney’s view, Milton Friedman — the famed Chicago economist, Nobel Laureate and advisor to Margaret Thatcher’s monetary policy — abused Adam Smith’s vision of a moral economy and led to the “corrosion of the drift from moral to market sentiments”. Carney, to be sure, “does not want to pin it all on Milton Friedman”, but the Nobel Laureate moved the pendulum “in the direction of the primacy of profit”. The caricatured economist hence became ‘one who knows the price of everything but the value of nothing’.
The appointment of Mark Carney as UN special envoy encapsulates the move in a number of countries that seek to link central banks directly to the climate change cause. Many Western private banks and multilateral financial institutions such as the World Bank, the Asian Development Bank, the European Investment Bank and the International Monetary Fund have already stopped funding of fossil fuel-based projects.
Dirty or Not Dirty?
The European Central Bank now pursues policies to coerce European banks and private sector companies to defund ‘dirty’ industries. Companies that issue debt will be pressured to avoid the fossil fuel sector and instead to make ‘green’ investments that have the approval of the ECB. The ECB will start accepting bonds linked to ‘sustainability’ goals in January as part of the the bank’s President Christine Lagarde’s drive to press ahead with the green agenda.
So Europe’s central bank will now be involved in defining which industry is more ‘dirty’ and which less,…