Central banks and supervisors have a key role to play in ensuring a smooth and timely transition to a net-zero economy.
Governments have committed to limit the global temperature rise to as near to 1.5°C as possible. But according to Bank of England research, the global financial system is still supporting emissions that will trigger runaway warming that exceeds 4°C. Many analysts, including the Intergovernmental Panel on Climate Change, now believe that unless monetary flows are rapidly reoriented, the world’s efforts to address the climate crisis will have no chance of success.
There is also widespread agreement that financial institutions – and the financial system as a whole – face severe consequences if they fail to adapt. If warming is left unchecked, extreme weather events will cause huge losses. And if markets fail to anticipate regulation that makes future activity unviable, high-carbon firms and their supply chains could see a sudden and significant drop in value.
Climate advocates say that central banks’ regulatory regimes and monetary policy operations can guide the reallocation of capital, so that markets are aligned with the Paris climate goals as quickly and smoothly as possible.
While there has been significant progress in the last few years, particularly on the disclosure of climate-related risks, many climate groups say central banks must be willing to go further and faster. They say that in order for central banks to fulfil their mandates to uphold monetary and financial stability, they must integrate climate considerations across their activities. Financial authorities are implementing climate policies with varying levels of speed and ambition. The Green Central Banking Scorecard ranks G20 central banks on their climate action across financial regulation, monetary policy, research, and their own internal operations. The links below offer further detail on the actions being taken by central banks in some of the world’s largest economies.