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International collaboration and improved macroeconomic modelling are crucial for high-impact central banking, central bankers said during an event launching the latest Green Central Banking scorecard.
Emmanuelle Assouan, general director of financial stability at Banque de France (BdF), and David Salles de Barros Valente, senior advisor for prudential regulation at Banco Central do Brasil (BCB) discussed the issues raised by the latest scorecard results.
Both speakers recognised the importance of banks capitalising against climate and nature risks but expressed caution about implementing climate-specific capital requirements under Pillar 1 until the Basel Committee reaches a clearer consensus.
The updated scorecard, produced by Positive Money, sees France topping the rankings, partly due to its introduction of explicit exclusionary policies for fossil fuels, while Brazil advanced to fifth place. South Africa saw the biggest rank jump among G20 nations, whereas the US ranked 17th and the UK and Canada stalled on progress.
Zack Livingstone, senior researcher at Positive Money and lead author of the scorecard who also joined the panel, highlighted the report’s key recommendations for central banks. These include coordinating with governments to increase fiscal space for public climate spending, implementing robust taxonomies, and developing climate- and nature-informed inflation forecasting.
He also called on countries with greater resources and historical contributions to climate change to take on more responsibility.
High-impact monetary policy and international standards
Despite the reservations about capital requirements, both Assouan and Valente rejected the notion that central banks are powerless to prevent climate risk accumulation in the meantime. They outlined how their institutions are already using existing tools under Pillars 2 and 3 to address climate risk. These include supervisory reviews, internal capital adequacy assessments, disclosures and stress tests.
Valente said that “Central banks can impose capital requirements for banks on their exposures to, for instance, climate risk. And central banks can impose limits on exposure by financial institutions to climate risk.”
Answering a question regarding the global implications of persistent inaction by the US Federal Reserve on climate policy, Valente stressed that Brazil could “lead by example” and continue collaborating with the many authorities that are committed to implementing global standards.
As it holds the G20 presidency and will be hosting Cop30 next year, Brazil is well positioned to not only safeguard its own financial system through low cost tools such as climate-informed liquidity limits, but also to lead the way on high-impact monetary policy globally.
Inflation forecasting and macroeconomic modelling
The panel acknowledged the significant impacts of climate change on price stability and the urgent need to improve modelling of these effects.
Suranjali Tandon, moderator and visiting senior fellow at the Grantham Research Institute, noted that the inflationary effects of climate shocks are already evident in the real economy.
Valente emphasised that central banks “must be ready to exert our power as financial regulators” to prevent these effects from reaching the financial sector, as real economy effects are likely to precede financial stability impacts.
Assouan highlighted progress made by the BdF and the ECB in adopting a more forward-looking approach to climate and environmental risks, but noted that macroeconomic tools for capturing these dynamics are still developing.
Nature-related risk modelling is in particular need of improvement, Assouan argued, urging central banks to address these risks as vigorously as climate risks. Advancements are also needed in modelling climate-related real economy-financial system interactions and short-term physical risk scenarios, she stated.
Despite current limitations, Assouan reported rapid growth in BdF and ECB-published climate research, albeit largely focused on transition risk. This work is crucial, she said, to provide the “guardrails” needed to “steer the transition”, while recognising it is ultimately up to governments to lead this process.
Financing the transition: looking to the future
Assouan highlighted the importance of increasing finance to the global south as well as the potential of green resecuritisation to meet European climate funding European needs, which are presently primarily met through banking loans.
She also emphasised the urgent need for scaling global adaptation finance, citing a significant funding gap and identifying this as a key focus for the BdF-hosted Network for Greening the Financial System.
Addressing the currency risk caused by issuance of concessional debt in foreign currencies to the global south, Valente argued that fundamental solutions should come from global north debt issuers. While global south regulators should focus on improving internal management of associated risks.
The event concluded optimistically, recognising progress while urging regulators to further intensify efforts to address climate and nature risks.
According to Livingstone, progress by leading central banks demonstrates that there is no “mainstream consensus that central banks can shy away” from climate issues, expressing hope that this “momentum could continue through the year and then into 2025 and beyond”.
This page was last updated October 2, 2024
Written by
Ike Walker, a Green Central Banking contributor since 2023, has a decade's experience in research writing. An Utrecht-based scholar, Ingrid specialises in transformative justice, green finance, law and systems change. They are an Utrecht University's Bright Minds scholar and previously worked for Cambridge University and various justice-based NGOs.
