Greening central banking

Why green central banks?

Climate change has the potential to affect all areas of the economy. It’s a threat to the stability of the financial system that could cause more damage than COVID-19 and the 2009 financial crisis combined.

There is broad consensus that financial streams need to be redirected into sustainable activities to create an economy that preserves rather than threatens the basis of our existence. So far, most of the debate and regulatory initiatives to green the financial system have focused on commercial banks.

But recently there has been a growing recognition of the role central banks have to play in supporting the development of green finance and addressing risks associated with climate change.

Traditionally, central banks haven’t explicitly factored environmental and social objectives into their decisions or evaluated their impacts beyond the narrow monetary domain. But environmentally unsustainable economic activity has become a concern for central bankers and financial regulators, as climate risk is also a source of financial risk. Where the economy as a whole is endangered, financial stability is affected. This relates directly to the role of central banks as guardians of financial, monetary and macroeconomic stability.

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A basis for debate

The debate is under way. But more work is needed to build a basic understanding of how climate change can affect central banks and their function, and how central banks can contribute to the transition to a green economy. This has prompted PwC Switzerland to prepare a report: The greenness of central banking: rethinking the macroprudential framework.

Rather than set out a one-size-fits-all approach to ‘greening’ central banks, the report provides insights into the implications of climate change for the operations, governance and role of central banks. It covers the following areas:

• Initiatives such as the EU Action Plan and their impact on global central banking
• Central bank mandates to respond to climate-related risks
• An overview of measures already being taken by selected central banks
• A matrix assessing the impact of proposed measures on the divisions of central banks
• The paper also makes recommendations how central banks can introduce changes to portfolio management and monetary policy, risk management and financial stability and additional supporting measures
  

The conclusions?

Despite COVID-19, now is a good time to act to rebuild more sustainable economies after the pandemic – and greener central banks could be a foundational building block. Central banks themselves have an opportunity to support this effort by focusing on their portfolio management processes and the role of climate-related risks in monetary policy, financial stability, and their own internal processes and capacity-building efforts. For central banking to become ‘green central banking’, it will be important to cooperate and align internationally to streamline efforts and help ensure a consistent approach.