Central banks have a ‘core duty’ to fight against climate change, says BdF’s Villeroy

May 2, 2023|Written by |Banque de France, European Central Bank

Dealing with the effects of climate change is a “must have” issue for central banks, Banque de France (BdF) governor François Villeroy de Galhau said in a speech at the City Week conference in London on 24 April.

Villeroy, who also sits on the European Central Bank’s governing council, said climate change is one of the long-term risks that financial institutions face, and it is the responsibility of central banks to monitor that risk. The “core duty” of central banks is “to deal with the effects of climate change on the economy”, he said.

“Central banks’ core mandate worldwide is price stability, and climate change already affects the level of prices and activity. It’s not mission creep, it’s not a politicisation of our mandate – it is our core business and core duty”, he stated.

Villeroy compared climate change to globalisation a few decades ago, saying that “we knew that it would have significant effects, inevitably and everywhere, while not knowing their magnitude ex ante”. He said central banks need to make sure climate transition is as “early, predictable and orderly as possible” as not doing so would be costly.

Central banks should also provide market incentives through carbon pricing and greening their portfolios in order to give “the right market signals and inducing changes”, Villeroy said.  The ECB started to decarbonise its corporate portfolio in 2022 but has not yet revealed climate-related disclosures on all of its holdings.

However, he added that “central banks cannot be the only green game in town, they cannot replace sound public policies and corporate transition plans”. He later noted the need for international coordination, especially as not all countries have signed up to the Paris Agreement.

“Climate change must be the number one priority of the ‘focused multilateralism’ I am calling for, be it in the G20 or in the IMF and the World Bank”, he said.

While climate stress tests have been carried out in some jurisdictions, Velleroy noted that there is a “veil of uncertainty” on the impact of climate change and a need for more guidance on shorter-term scenarios.

As a result, the Network for Greening the Financial System, which many central banks are part of, plans to publish a conceptual framework by the end of the year and the first short-term scenarios by the end of 2024, he said.

This page was last updated May 2, 2023

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