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Sometime in February or March last year, the world economy looked down and stared into a deep, dark chasm from which there seemed to be no return. But, miraculously, the economy managed to pull back from this cliff-edge. The world economy is not back to pre-covid levels yet, but many of its old levers and gears are back to their familiar routine. The credit for this lies squarely with central banks. In India, too, the onus for rejuvenating the economy was shifted disproportionately to the slender shoulders of the Reserve Bank of India (RBI) while the government obsessed over its fiscal mascara.

This undue reliance on central banks is an interesting pivot; it comes at a time when fiscal conservatives have been debating, especially in Western economies, whether central banks acquired extraordinary powers during the great moderation and after, a period during which low inflation accompanied economic stability for an extended time-frame of over two-three decades. It is, perhaps, time to look beyond central banks—which will undoubtedly continue to play a decisive role in ensuring economic and financial stability—and pay attention to some former and existing central bankers who are now offering their knowledge to markets. The pandemic has forced many of them to start paying attention to another imminent risk that can no longer be disregarded or denied: climate change.

A relevant example is perhaps Mark Carney, who has the unique distinction of occupying the governor’s post at two large central banks, Bank of England and Bank of Canada. He has now been appointed the UN Secretary-General’s special envoy for climate finance, and UK Prime Minister Boris Johnson’s finance advisor for the 2021 UN Climate Change Conference in Glasgow. Delivering the BBC’s annual Reith Lectures for 2020, Carney focused on showing how financial values have become superior to human values, how we have moved from a market economy to a market society, and how these trends have contributed to a series of crises relating to credit, covid and climate. Carney not only laid bare the myth of “perfect" or “competitive" markets, but also highlighted the inherent contradiction in the belief that markets always self-correct: “A deep-seated faith in markets lay behind the new era thinking of the Great Moderation. Captured by the myth that finance can regulate and correct itself spontaneously, authorities retreated from their regulatory and supervisory responsibilities. This leads to... the belief that the market is always right… [though] markets only clear in text books."

Carney feels that markets, which may not have answers to all our questions, in conjunction with the financial sector can definitely solve some of humanity’s greatest challenges, such as the climate crisis. The outcomes must however be measured through income and welfare benchmarks that align with human values, and not just an outdated accounting metric like gross domestic product (GDP).

There are other central bankers speaking out about climate change and the financial system’s role in either abetting it or helping reduce its deleterious impacts. Lael Brainard, member of the board of governors of the Federal Reserve System, outlined the risks in a 20 December speech: “Climate change could pose important risks to financial stability. That is true for both physical and transition risks. A lack of clarity about true exposures to specific climate risks for physical and financial assets, coupled with uncertainty about the size and timing of these risks, creates vulnerabilities to abrupt repricing events."

Central banks across the world are converging to meet challenges from the climate crisis. In 2017, eight central banks and supervisors came together to form the Network for Greening the Financial System (NGFS) to analyse and manage these risks in the financial system. The Federal Reserve joined NGFS in December 2020, taking the number of central banks enrolled to 70.

Another important development being shepherded by central bankers is The Task Force on Climate Related Financial Disclosures (TFCD), managed under the aegis of the multilateral Financial Stability Board (FSB), to develop a global framework for climate-related financial disclosure norms. As of October 2020, almost 1,500 organizations had voiced their support for TFCD, which included 1,340 companies with a combined market capitalization of $12.6 trillion and financial institutions managing assets worth $150 trillion. About 32 Indian organizations have signed up for TFCD, including the Mahindra Group, Wipro, the Confederation of Indian Industry, National Stock Exchange, DLF, Havells India, Hero MotoCorp, Piramal Enterprises and four Adani Group companies. This is still voluntary and needs to be made mandatory across jurisdictions. A start can be made with G20 nations since the FSB was created during the G20 Leaders’ Summit in Pittsburgh.

Indian authorities need to dial up their seriousness about climate change. For example, RBI is not yet a member of NGFS and it’s still unknown whether it intends to sign up, though an April paper by its staffers found a direct link between climate change and inflation. Regulators and authorities dealing with companies and capital markets in India must also standardize and mandate climate-related disclosures in all financial statements. The new year stipulates that we learn the lessons of 2020.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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