Climate-neutral central banking: How the European System of Central Banks can support the transition to net-zero

This policy report examines why EU central banks need to adopt net-zero climate strategies and offers seven concrete recommendations for how they can do so. Jointly published by the London School of Economics’ Grantham Institute and SOAS University of London, it uses a global framework published earlier by the authors to explore and examine the European context.

Climate neutrality is a key pillar of the European Union’s Green Deal programme and EU central banks are beginning to recognise the imperative of alignment with the net-zero target consistent with the Paris Agreement. However EU central banks and financial supervisors need to ensure that their activities are coherent with the climate neutrality policies of the EU and its member states, the authors say. A net-zero ambition is also the best way of minimising the risks of climate change to the stability of the EU economy and financial system, they show, arguing that the European System of Central Banks (ESCB), led by the ECB, therefore needs to mainstream net-zero across all ESCB operations.

With the need established, the report then offers seven detailed policy recommendations for the alignment of EU central bank and supervisor approaches with climate neutrality. A strategic “climate neutrality roadmap” is required, with both long-term expectations and near-term actions. Climate considerations should be embedded into prudential regulation, monetary policy and portfolio management, and forward-looking scenarios need to become more consistent with a climate neutrality pathway. The social justice implications of climate policy must also be assessed and mitigated, the authors recommend, and climate neutrality needs to be incorporated into the way that EU central banks operate within international financial and regulatory frameworks and processes.

Each of the recommendations is an application of a global framework set out by the authors in an earlier publication and applied to the specific priorities and mandates of EU central banks. However the core messages are applicable to all central banks. “Monetary and financial authorities will need to play a pivotal role in shaping the tools, methodologies, data systems and taxonomies required for net-zero,” the report concludes. “Crucially, they also need to align their own policies and operations with net-zero.”