Central Bankers Weigh Using Monetary Policy in Climate Fight


Global central banks should take a leap in fighting climate change, offering to use their core business of monetary policy to drive the financial sector’s green transition.

That’s the conclusion of the Network for Greening the Financial System, a group of 89 central banks and supervisors that includes the U.S. Federal Reserve and the European Central Bank. It outlined options on how the institutions can prod nations to lower carbon emissions, including adjusting credit operations to shifting collateral policies and asset-purchase programs.

“Now is the time for central banks to seriously consider how the progress made in reflecting climate-related risk in supervisory and macroprudential methods can be matched by similar steps in monetary policy operations,” NGFS Chair Frank Elderson, who is also an ECB board member, and Sabine Mauderer, an executive at Germany’s Bundesbank, wrote in the foreword of the report published Wednesday.

Monetary policy has long been considered an inappropriate vehicle to address global-warming risks, with central banks pointing the finger at governments while focusing their efforts mainly on financial-stability concerns. The debate has shifted over the past year, after the coronavirus pandemic highlighted just how vulnerable economies -- and institutions that run them -- are to unexpected global shocks. The NGFS said waiting to act may be costly for economies.

The NGFS argues that climate-related changes to central bank’s operational frameworks are “feasible.” Data gaps and practical challenges mean there’s no single-best tool guaranteeing maximum effectiveness as monetary-policy instrument while mitigating climate and financial risks and being operationally possible. In fact, several options may risk curtailing the scope for central-bank operations and the policy space.

Central Bankers Weigh Using Monetary Policy in Climate Fight

“The optimal policy for many central banks is likely to be to adopt gradual, predictable, precautionary risk-protection measures,” the NGFS wrote in its report.

There’s already consensus among members that, at the very least, central banks should carefully assess and add risk management measures to protect themselves against financial costs of climate change. Institutions -- like the ECB -- that rely predominantly on the credit channel for its policy transmission might do more because they’re particularly exposed.

The ECB is putting climate at the heart of a broader strategic review into its operations and is due to present results after the summer break. In their public remarks, policy makers have already mentioned some of the options the NGFS presented.

Climate Options for Central Banks

Credit operations
  • Adjust interest rate on lending operations to reflect banks’ climate-related credit provision
  • Adjust interest rate on lending operations to reflect the composition of pledged collateral
  • Make access to lending facilities dependent on certain climate disclosures
  • Adjust haircuts to better account for climate risks
  • Negative screening to exclude otherwise eligible assets based on climate risks
  • Positive screening to incentivize support of environmentally friendly activities
  • Align composition of collateral pool with climate-related objective
Asset purchases
  • Tilt purchases according to climate-related risks
  • Negative screening to exclude some assets or issuers

The NGFS said that targeting credit may help tackle a bias toward backing debt linked to high-carbon industries. It also argued that central banks shouldn’t wait for comprehensive data before taking action. It said disclosure requirements in monetary-policy operations could help.

“Central banks should be cognizant of the risk that acting early with imperfect information could be less costly than acting only once stronger data standards have emerged,” according to the report.

©2021 Bloomberg L.P.

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