S7 Ep57: Can central banks green the financial system?
Dec 3, 2024
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Frank Elderson, a key figure at the European Central Bank and a leader in climate-related financial risks, delves into how central banks can tackle climate change. He discusses the proactive measures required to integrate climate risks into financial systems and the limitations of monetary policy. Elderson emphasizes the urgent need for greater climate finance and the vital role of institutions like the NGFS in fostering sustainable financial practices. Insights from recent discussions at COP29 highlight massive investment needs to meet global climate goals.
Central banks must integrate climate risks into their monetary policy frameworks to ensure long-term economic and price stability.
The Network for Greening the Financial System fosters collaboration among central banks to effectively address climate-related financial risks.
Deep dives
The Role of Central Banks in Climate Policy
Central banks are increasingly recognizing the significance of climate-related issues in maintaining price and financial stability. Although their primary objective is price stability, they understand that neglecting climate risks undermines this goal. For instance, the severe droughts in the EU led to measurable impacts on GDP and food price inflation, highlighting the interconnectedness of climate and economic stability. Therefore, central banks must consider these factors when implementing their policies, reinforcing the idea that they have a role to play in addressing climate challenges through their financial mechanisms.
Actionable Tools for Addressing Climate Risks
Central banks are adopting various tools to effectively integrate climate considerations into their operations without compromising their primary focus on price stability. One approach involves adjusting their corporate bond purchasing programs to favor green investments, demonstrating their commitment to supporting environmentally sustainable projects. This proactive strategy is rooted in the legal obligation outlined in EU treaties, which mandates that central banks contribute to broader economic policies aligned with climate objectives. By tilting their lending and investment strategies towards green assets, central banks aim to leverage financial instruments for climate resilience.
Collaborative Efforts Through Global Networks
The establishment of the Network for Greening the Financial System (NGFS) marks significant international collaboration among central banks to understand and manage climate risks. Initially formed with eight central banks, the NGFS has expanded significantly, reflecting a growing consensus on the need to address climate-related risks within the financial system. This network facilitates the sharing of analytical frameworks and best practices, enabling members to better quantify and mitigate both physical and transition risks. As awareness increases, central banks are becoming more proactive, highlighting that the collective effort is essential for sustainability in the financial sector.
Climate change, and policies that governments implement to address it, increasingly have macroeconomic impacts that are relevant for Central banks. But, within their remit, what actions can monetary policymakers take, and what actions should they take? These are questions that Frank Elderson is well qualified to answer. He is a member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, he is co-Chair of the Task Force on Climate-related Financial Risks of the Basel Committee on Banking Supervision, and he was the first Chair of the Network of Central Banks and Supervisors for Greening the Financial System. He tells Tim Phillips about the instruments available to the ECB, the contribution of the NGFS, and the limits of monetary policy in addressing the urgent challenge of climate change.
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