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Reeves pushes Bank of England to prioritise climate change alongside economic growth

October 30, 2024

Rachel Reeves is expected to make climate change a core priority for the Bank of England in her first Budget as Chancellor, calling on Governor Andrew Bailey to give environmental concerns the same weight as economic growth.

This shift, conveyed in a letter to Bailey on Wednesday, will reintroduce climate change as a focus for the Bank’s Financial Policy Committee, reversing former Chancellor Jeremy Hunt’s 2023 decision to downgrade its importance.

Ms Reeves’s move aims to align the Bank of England’s priorities with Labour’s commitment to make Britain a “clean energy superpower,” a manifesto promise to accelerate the country’s transition to net zero. Under this new mandate, the Bank will balance climate action with other key objectives, such as supporting economic growth and promoting home ownership.

The decision, however, has sparked debate, with critics questioning whether the Bank should focus on climate-related risks amid pressing inflationary pressures. Former Bank of England governor Lord Mervyn King has argued that climate change responsibilities distract from the Bank’s core mandate to maintain price stability. “The Bank of England can do nothing about climate change,” he said, stressing that its primary focus should remain on controlling interest rates and inflation.

Bailey himself has acknowledged the need to address climate risks but cautioned that climate action is outside the Bank’s main remit. Similar concerns were echoed by the House of Lords Economic Affairs Committee, which warned last year that an increased focus on net zero could hamper the Bank’s inflation-fighting capabilities. The committee urged the Treasury to “prune” the Bank’s mandate, highlighting a risk of politicisation.

Labour has countered that addressing climate risk is critical to safeguarding long-term economic stability, pointing to financial system vulnerabilities posed by environmental factors. Ms Reeves has enlisted former Bank of England governor Mark Carney, who during his tenure brought climate risks to the forefront of the Bank’s agenda, to advise on attracting private investment and establishing a national wealth fund.

The Bank’s climate focus was notably scaled back under Mr Hunt, who last year replaced “climate change and energy security” with “productive finance” and “growth and competitiveness” in the Financial Policy Committee’s remit. This change led the Bank to reduce its climate initiatives and reallocate resources, according to Bailey. The shift marked a stark contrast from Rishi Sunak’s tenure as Chancellor, during which he underscored climate change 13 times in his letter to the Bank.

With Ms Reeves’s proposed changes, the Bank of England may need to navigate an expanded mandate, which critics argue could dilute its effectiveness in managing inflation and monetary policy. The Treasury and the Bank of England have both declined to comment, but analysts suggest that the Chancellor’s climate focus is likely to influence policy across the broader financial sector.