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Why Central Banking Must Go Green

Given the scale of the economic and financial risks posed by climate change, central banks simply cannot ignore the issue. Their own price-stability mandates demand that they start playing an active role in pushing the private sector and the broader economy toward decarbonization and greater climate resilience.

BOSTON – Just as there is no question that climate change brings enormous economic and financial risks, there should be no question that central banks can and must play a role in addressing this mother of all market failures. As central banks in the United States and Europe tighten credit to regain control of inflation, they should also use their supervisory and monetary-policy tools to catalyze and incentivize the transition to a carbon-neutral economy. Inaction is not an option, even if most central banks have not officially incorporated climate-risk management into their mandates.

Most central banks already accept that they will have to help navigate the transition to net-zero carbon emissions. Under new reporting rules established by the Bank of England – through the Prudential Regulation Authority – more than 1,300 of the largest UK-registered companies and financial institutions now must disclose “climate-related financial information.” Similarly, the European Central Bank is encouraging climate-related disclosures by announcing that it will accept as collateral only assets that comply with its forthcoming Corporate Sustainability Reporting Directive.

Even the US Federal Reserve – one of the last major central banks to join the Network of Central Banks and Supervisors for Greening the Financial System – now accepts that it must play a supervisory and risk-mitigation role when it comes to climate change. Last year, it established the Supervision Climate Committee to assess US-based financial institutions’ microprudential readiness, as well as the Financial Stability Climate Committee to evaluate the macroprudential risks of climate change.

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