Enter the Bank of England, stage left
Andrew Voysey Director, Finance Sector
13 March 2015
A rather extraordinary thing has happened at the Bank of England.
Under the auspices of its 'One Bank Research Agenda', the Bank launched a series of "big questions" on 25 February. These questions, the Bank argues, relate to its mandate to ensure the safety and soundness of financial firms and to maintain economic and financial stability. Listed among its priorities is to understand the impact that both climate change and income inequality may have on financial stability.
This may come to be seen as a profound moment in the world’s attempts to align the economy with social and ecological imperatives. Why? The Bank certainly isn’t the first institution to identify that such questions matter – the People’s Bank of China, for instance, has engaged with these issues too. Indeed, this isn’t even the first time that we’ve learned the Bank is considering these questions. But as I sat with the other invitees listening to it unveiling its plans, three things struck me:
1. The power of the signalling device
The Bank is acutely aware of the scrutiny applied to its communications around the world. So important is its role that the Bank has started to explore how 'semantic analysis' could help it understand the impact of its language on market sentiment. Over the past few months, we have seen the Bank’s Governor first comment that "the vast majority of [fossil fuel] reserves are unburnable", then write a letter to Parliament indicating that he expected climate change to feature within its horizon-scanning work on financial stability risks. We have now arrived at a moment where the Bank has included this question in its formal research agenda. To those watching closely – and many do – this steady ratcheting up of intent from the Bank with regards to climate change is powerful signalling.
2. Opening up at the heart of the system
An underlying theme of the launch was a series of questions, rather than answers, about the ability of any one central bank to control a complex, global financial system. This is a profound shift for an institution whose sole mandate used to be the controlling of inflation through monetary policy and now finds itself, post financial meltdown, needing to respond to a very different context. For those who view climate change and income inequality as systemic issues that require new forms of collaborative leadership, this subtle but important opening up should be welcome.
3. Institutional backing
Another striking feature of the launch was the active involvement of not just the Bank’s Governor (on multiple occasions) but of each of his Deputy Governors. If there was any suspicion that change is being driven by one or two individuals at the Bank, there was a clear message on display that this is not the case.
The arrival of this globally influential character on the scene is both refreshing and significant. What does it mean for the University of Cambridge Institute for Sustainability Leadership (CISL) and our network? One thing’s for sure: this should be of interest to more than just those already working with the financial sector on its role in sustainable development. To 'rewire' the financial system for a sustainable economy, we have to work on both the demand for and the supply of capital at the same time.
By demand for capital, I mean changing what the 'real economy' seeks capital for, guided by policy frameworks and business leadership. The work of The Prince of Wales’s Corporate Leaders Group and the Green Growth Platform, for instance, helps to create the political space for action to increase investment in clean energy.
By supply of capital, I mean changing what the 'financial economy' is encouraged (and in some cases allowed) to finance. This is the focus of the business platforms CISL convenes in the insurance (ClimateWise), banking (Banking Environment Initiative) and investment (Investment Leaders Group) industries.
Over the past 18 months, some within these groups have been looking beyond the boundaries of voluntary business leadership to examine what role financial regulation should play in directing capital towards sustainable economic development. Their approaches typify the different ways that CISL supports such efforts. With the banks, for instance, we commissioned expert analysis to create objective foundations for engagement with regulators. The investors are supporting pioneering new research we have designed that will inform their thinking about investment risk management. And the insurers are working with CISL to create a safe space for leaders to explore difficult questions face to face with certain regulators.
As the Bank of England has emphasised, issues like climate change and income inequality could threaten the stability of the financial system. Clearly, working with both regulator and regulated can be sensitive territory. In our view, however, the magnitude of the issue – quite apart from the interest now being shown by the Bank – provides sufficient justification to create a bridge between financial regulators and our business platforms on this topic. The stage is set for an interesting next chapter.