Central Banking, Climate Change, and Green Finance
Central banks are in a powerful position to support the development of green finance models and enforce adequate pricing of environmental and carbon risk by financial institutions.
Responsibility for financial and macroeconomic stability implicitly or explicitly lies with the central bank, which therefore ought to address climate-related and other environmental risks on a systemic level. Furthermore, central banks, through their regulatory oversight over money, credit, and the financial system, are in a powerful position to support the development of green finance models and enforce an adequate pricing of environmental and carbon risk by financial institutions. We have a look at public financial governance policies through which central banks, as well as other relevant financial regulatory agencies, can address environmental risk and promote sustainable finance.
First, we discuss the reasons why central banks should be concerned with aligning finance with sustainable development. Second, we review the tools and instruments that can be utilized by central banks and financial regulatory agencies to address environmental risk and promote green finance and sustainable development. Third, we provide a brief review of green public financial governance initiatives.
WORKING PAPER NO: 867