Mandates guide central bank policymaking, defining the role governments wish them to undertake. While only a minority of central banks currently have specific sustainability objectives, a majority are taking climate action in some form, particularly steps geared towards mitigating climate-related risks to the financial system.
A consensus has emerged that neither price stability nor financial stability can be delivered effectively without considering the implications of climate change, given its all-pervasive impact on the global economy. Recently, nature loss has begun to receive a similar level of attention.
But as pressure grows on central banks to move beyond a narrow risk management framework towards proactively supporting the greening of the financial system, the question of exactly what central banks’ mandates entail – and how they are interpreted – has never been more important.
Relatively few central banks have specific sustainability objectives… yet
A study of central bank mandates by researchers at the LSE Grantham Institute found that only 12% refer explicitly to sustainability, or to sustainable development or growth. For example, the Bank of England (BoE) is required to consider the transition to net-zero emissions as part of its support for the government’s economic strategy.
A further 40% potentially have an indirect sustainability mandate via a duty to support government policies, which may include environmental commitments. The European Central Bank (ECB) is required to support the general economic policies in the European Union, and this has been cited as obliging it to support the EU’s climate goals. ECB executive board member Frank Elderson wrote in a blog post that environmental protection is stipulated in EU law as one of the economic objectives of the bloc, therefore making it a consideration for the ECB.
The remaining central banks’ mandates reviewed in the survey did not include any explicit or potentially implicit sustainability objectives, although the researchers found that the majority of those central banks had still taken some steps to address climate-related risks and sustainability challenges.
The majority of central banks are taking climate action in some form
Despite so few central banks having sustainability references in their mandates, the majority of central banks see climate action in some form as being consistent with their responsibilities. A 2021 survey of central bankers commissioned by the investment management firm Invesco found that 63% saw climate change as falling within their remit. This was up from 46% the previous year. In addition, 45% agreed that mitigating the consequences of climate change should be an objective of monetary policy.
The acknowledgement of climate risks to financial and monetary stability is a relatively recent phenomenon. BoE governor Mark Carney issued a then-unprecedented warning about the problem in a 2015 speech, Tragedy of the Horizon. He said the financial sector could face huge losses if firms and regulators failed to anticipate the effects of extreme weather events, and of global efforts to reduce emissions. He concluded this should be addressed in part through more consistent and reliable disclosures.
In the same year, the Taskforce for Climate-related Financial Disclosures was established to create a framework for the sharing of material by companies and investors as a way to help financial system actors to assess their exposure to climate risks. These have since been embedded in supervisory expectations around the world, and such disclosures are beginning to be made mandatory.
Two years later, global central banks and supervisors came together to establish the Network for Greening the Financial System (NGFS), to conduct research and develop policy on managing climate risk. The group now has 108 members, including authorities from every G20 country except Saudi Arabia. The NGFS has issued a set of recommendations for central bank action on climate, including building capacity to understand climate risks, setting new supervisory expectations, and integrating climate risks into central bank operations.
More detail can be found on the climate actions being taken by individual central banks in the Green Central Banking Scorecard.
Nature loss is increasingly seen as relevant to macroeconomic stability
No comprehensive study appears to have been undertaken to determine whether central banks regard action on nature loss as falling within their mandates, and NGFS chair Frank Elderson has acknowledged that the issue has received relatively little attention.
However, this looks set to change, with the NGFS warning in March 2022 that nature-related risks are relevant to macroeconomic stability and should be considered by central banks. The network also announced the creation of a taskforce to mainstream nature risks across all its activities.
With or without sustainability mandates, some central banks are pursuing environmental goals
While the majority of central banks’ activity on sustainability issues has been geared specifically towards mitigating related risks to the economy and financial system, some have also deployed policies aimed at supporting green finance, or at proactively shifting financial flows in line with the green transition.
There are cases of central banks doing this even without a specific sustainability mandate. The Bank of Japan (BoJ), which has no mention of sustainability in its objectives, has established a green loans scheme providing zero-interest financing to lenders supporting action to address climate change. Governor Haruhiko Kuroda has justified taking action on climate by arguing that doing so falls within the BoJ’s duty to uphold price stability and financial stability.
“From a central bank standpoint, with its mandate of achieving price stability and ensuring the stability of the financial system, supporting the private sector’s efforts on climate change will help stabilise the macroeconomy in the long run,” he said.
Kuroda’s remarks reflect those of some academics who advocate the precautionary approach to climate risk, which recognises that the risks of climate change are characterised by radical uncertainty, and cannot be addressed by central banks’ existing tools and methodologies. Financial authorities must therefore proactively intervene to redirect financial flows in line with the low-carbon transition, they argue.
A stronger steer from governments could help central banks go further
In certain cases, central banks are facing accusations that their policies are overstepping their mandates on sustainability issues. For example, Republican lawmakers have sought to portray the Federal Reserve’s emerging climate agenda as amounting to the Fed making allocative decisions which are political in nature. This is despite the fact that the Fed’s policies are in line with the global mainstream on mitigating climate risk.
Although legal experts contend that existing mandates give central banks plenty of scope to act on climate and nature issues, a stronger steer from governments could provide them with greater scope to act in support of the green transition.
The BoE’s mandate was updated in 2021 to refer to the UK’s net-zero commitment. It has since overhauled its corporate bond purchase scheme with the aim of favouring climate-friendly companies, citing its new mandate as requiring it to take this action.
The People’s Bank of China exists in a unique political context, and its governance framework may not be easily transposed elsewhere. Yet climate advocates say there may be lessons to be learned elsewhere from the range of tools it deploys in support of carbon emissions reduction, delivered in cooperation with other government agencies. These include targeted refinancing operations and interest subsidies for green loan-supported projects.
Experts agree that redirecting financial flows is essential to facilitate the green transition, and to safeguard economic stability and living standards. Central banks and supervisors have at their disposal many of the tools necessary to catalyse this shift – a point acknowledged in the latest report from the International Governmental Panel on Climate Change, which calls for a stronger steer from regulators to support the greening of the financial system.
It is therefore likely that there will be an increasing effort to ensure the mandates of central banks and supervisors equip them to take on this challenge.
This page was last updated April 12, 2022
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