Network of Central Banks and Supervisors for Greening the Financial System (NGFS) released a landmark report, outlining options for central banks to reflect climate-related risks in monetary policy operations.
The report identifies nine specific policy options, assessing each according to effectiveness for monetary policy, risk protection and climate change mitigation.
“Central banks ought to be aware of climate risks for the integrity of their balance sheets. Even more so, they should get ready to respond to such risks swiftly and with determination,” said Dr Sabine Mauderer, executive board member of the Deutsche Bundesbank and chair of the NGFS green finance work stream. “Our report is a great blueprint to support central banks in making strategic choices on how to reflect climate risk in their monetary policy operations.”
Described as a technical document, the paper argues that climate change poses a risk to traditional monetary policy levers, and can disrupt lending and alter market expectations. The report suggests that central banks have a responsibility to review their operational frameworks to ensure resilience to climate-related risks and “to safeguard the continued smooth conduct of monetary policy.” It also urges NGFS members to consider adjustments across the main operational functions for implementing monetary policy.
The nine policy options were chosen for their relevance to multiple central banks and for their relationship to existing tools. They were rated for monetary policy effectiveness, contributions to mitigating climate change, effectiveness as risk protection, and for operational feasibility.
Potential changes to central bank asset purchases, credit operations and collateral policies are examined in detail, focusing on assets and liquidity instruments. The policy proposals judged to have the greatest climate impact include targeted credit operations, the positive screening of collateral, the alignment of collateral pools with climate targets, and the tilting of asset purchases to align portfolios with the targets of the Paris agreement.
The NGFS is a self-described “coalition of the willing” addressing climate change and green finance issues. This publication builds on an earlier NGFS report about the possible effects of climate change on the determinants of monetary policy. It is also informed by a survey of NGFS members on monetary policy operations and climate change.
This page was last updated April 23, 2021
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