Central banks discuss macrofinancial impacts of climate change

A joint Banca d’Italia (BoI) and Bank of England (BoE) research conference on the macrofinancial impacts of climate change has concluded with a call by BoI governor Ignazio Visco for international collaboration in the runup to Cop26. The two-day hybrid event, held in Milan and online, brought together central bankers and leading academics to discuss the latest research on the macroeconomics of climate change and the transition to a net-zero economy.

Introducing the event, Visco and BoE governor Andrew Bailey focused on knowledge gaps concerning the macroeconomic effects of the climate crisis.

“We are still struggling to fully grasp the complex interactions with and the transmission channels of climate change to the economy,” Visco said, warning of “significant implications” for monetary and fiscal policy. Much more research needs to be done, Bailey said, while warning that time is limited. “The window for responding to the climate change challenge is closing,” he said.

The  focus of the first day was on physical and transition climate risk, and on the effects of these risks on asset prices and the financial sector. Panels focused on the transmission channels and the geopolitical and sectoral impacts of both transition and physical climate risks, chaired by the BoE’s Sarah Breeden and San Francisco Federal Reserve Bank’s Glenn Rudebusch.

Sabine Mauderer of the Deutsche Bundesbank also chaired a panel on climate change, asset prices and institutional investors. The format consisted of leading academics offering brief presentations followed by a Q&A with the central bankers.

Today’s session focused on climate policies, with the BoI’s Ivan Faiella speaking with a range of academics on topics including the economic impact of delays in climate policy and climate policy instrument design.

Speaking on climate change and monetary policy, Stanford University’s Monika Piazzesi showed that the European Central Bank overweighs dirty sectors relative to market portfolio and argued in favour of green asset purchases. Lint Barrage of the University of California spoke on the interactions between technology, growth and climate policy.

The last session was a high-level panel discussion titled From Venice to Glasgow and chaired by Visco.

London School of Economics professor Nicholas Stern began with a warning. “The risks are immense and the time is short,” he said, and that the way forward is through investment. The composition of investment must change and global investment must rise by 2-3% of global GDP per year, Stern said, pointing out that unlike conventional ‘hands-off’ investment policies, this is “investment with a purpose” that will require new methods.

Gita Gopinath, chief economist at the International Monetary Fund, outlined the IMF’s three-pronged approach to climate: green investment and support for green research and development; carbon pricing and transparency on carbon exposures; and measures for a just transition, both within and across countries. “We are talking about profound sectoral changes,” Gopinath said.

Asked for their hopes for Cop26, most panelists called for some version of greater low-cost climate financing. The exception was De Nederlandsche Bank president Klaas Knot, who  called for a broad deal on mandatory climate-related financial disclosures and for a “reaffirmation” of the importance of carbon pricing.

Visco concluded the conference by reviewing his key takeaways from the event, including the abundance of evidence of substantial and systemic climate risks, the need for more and better information, and the need for much greater green investment and carbon pricing. He ended his remarks with a plea for international cooperation and collaboration in the days before Cop26.

Italy and the UK respectively hold the G20 and G7 presidencies in 2021, and are partners in leading the upcoming UN Cop26 climate change conference.