11 November 2019

Financial Times: Central banks’ mandates allow them to tackle climate change

There is now a wide consensus that climate change is a financial stability risk. Research by BlackRock shows that asset prices often do not reflect true exposure to physical climate risks and those related to energy transition. Central banks have a responsibility to make the financial institutions they supervise treat these risks as rigorously as any other.

But so far there has been only limited movement towards applying the same logic to central banks’ own balance sheets — in fact, none in the form of haircuts on collateral and only a little in the form of investment universe definition. Yet central banks, too, should care about their true risk exposure. That risk may be negligible in portfolios consisting almost exclusively of high-grade government bonds, but many central banks now own substantial amounts of corporate bonds, mortgage-backed securities and equities, for which climate risk can be substantial. Despite notable efforts by the Network for Greening the Financial System, there is much less consensus around using central bank balance sheets to fight climate change. Surveys indicate that some have started doing this in their portfolios unrelated to monetary policies, such as foreign exchange reserves, and more are in the process of considering it. But most are doing neither.

Central banks have a leading role to play in ensuring climate change doesn’t jeopardise financial stability. But they are also, now and for the foreseeable future, very large owners of assets that ultimately belong to the public. Wherever it is government policy to prevent and mitigate climate change, it logically follows that central banks should manage these assets to contribute to this goal as far as possible, without compromising their primary objectives. Their capacity to do this will increase as governments, agencies and the private sector increase climate disclosures and issuance of green securities.

Full article on Financial Times (subscription required)

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