|Written by Emma Thomasson
While Donald Trump’s presidency is a major setback to US efforts to fight climate change, and to attempts to forge international consensus on the issue, other parts of the world are pushing ahead with efforts to promote green finance.
Green Central Banking asked leading climate experts, economists and nonprofits what central bankers and financial regulators should focus on in 2025.
More data and research
Julia Symon, head of research and advocacy at Brussels-based Finance Watch, said central banks need to improve their economic modelling to better assess the impact of inaction on the climate: “There is a false sense of security on the side of policymakers,” she said.
Suranjali Tandon, assistant professor at India’s National Institute of Public Finance and Policy, agreed that collecting better data on climate risk was an essential step towards persuading regulators of the urgency of the problem.
“There’s not enough information available,” she said, noting it was helpful to adopt innovative approaches to measuring climate risk such as geospatial mapping. “It also increases the pressure to act once you’ve once you’ve measured the risks and the exposure.”
However, Jordan Haedtler, climate financial policy consultant, flagged the risk of potential manipulation of data if Trump fulfils his promises to overhaul or even dismantle parts of the administration: “The economic agencies that fall under his purview might be at risk of losing some of their independence.”
And Shona Hawkes, senior advisor at the Rainforest Action Network, cautioned against believing that collecting data is sufficient to trigger meaningful change.
“Those of us who work in civil society organisations, who’ve sat in meetings across from banks and presented them with reams and reams of data and evidence that they are financing a company linked to human rights abuses or environmental cases, know it’s not a data problem,” she said.
Enhance disclosure requirements
Building on the need to collect better data about climate risks to the financial system, regulators should also keep up the pressure to get institutions to disclose exposures.
A new set of EU rules comes into effect on 1 January which creates new expectations for banks to report risks to their financial stability, part of a package of legislation that implements the Basel 3 framework into European law.
“There is still the possibility for supervisors to go after the banks more,” Symon said, noting that the European Banking Authority (EBA) will work more on banks’ risk management practices.
Meanwhile, the Reserve Bank of India (RBI) will require banks to disclose their management of climate risks from the 2025-2026 tax year onwards
“There was a little bit of an apprehension because this would mean that there are higher compliance costs,” Tandon said.
But she is optimistic for reporting requirements promoted by the Network for Greening the Financial System. “Countries like India have moved slowly but surely, so I don’t see any backward movement on that progress.”
Tighten capital requirements regulation
The next step would be for central banks to pursue tougher regulation to force banks to account for climate risks and hold more capital to protect their balance sheets.
“Capital requirements should be adjusted upwards,” Symond said.
However, Tandon was not hopeful for progress in this area: “I don’t assume that many central banks will be proactive in introducing capital adequacy norms for lending to ‘brown’ sectors because it basically means that there’s a recognition of potential bad loans on your balance sheet which doesn’t look great.”
Broaden the debate and think bigger
Hawkes, senior advisor at the Rainforest Action Network, urged regulators to be more ambitious.
“Let’s run towards what works rather than lowering the bar,” she said. “Let’s set some ambition and let the first movers run towards it. How do we think about the financial system that we want, not just tweak the one that we already have?”
Hawkes highlighted that the recent Cop16 on biodiversity agreed on an expanded role of Indigenous Peoples and local communities in saving biodiversity.
“There’s increasing awareness that if we want to change the status quo on what finance today means for biodiversity and climate outcomes it can’t just be financial insiders talking to financial insiders. We actually need a much broader discussion,” she said.
Probe inflation links
Central banks should do more to investigate the relative impact of fossil fuels and renewable energy on inflation, according to Philippe Ramos, advocacy officer from campaigning group Positive Money.
“The ECB should do very rigorous studies to identify what is the link between green investments and a lack of inflation,” he said, noting that a continued reliance on fossil fuels made economies more vulnerable to energy price shocks.
Tandon noted that the RBI was already probing the climate impact on inflation due to extreme weather events in India in recent years which have hit crop production and pushed up commodity prices.
Haedtler believes this will also be a topic of interest for the US Federal Reserve, even during the Trump presidency.
“There will be some economists in the White House and some political figures on the right who take more seriously how supply chain disruptions can cause price shocks,” he said. “Climate change is going to exacerbate supply chain disruptions.
“I don’t expect Trump appointees at the Fed to couch things in exactly those terms but I do think that it will be a promising area of study that will continue, even under Trump appointees at the Fed.”
The US will also be focused on the impact on inflation from rising insurance premiums and how that affects the mortgage market, the municipal bond market and the real estate market, Haedtler said.
Encourage lending to renewables
More central banks should follow the example of Bangladesh and set green lending targets, according to Andrew Sheng, fellow of the Asia Global Institute at the University of Hong Kong and chief adviser to the China Banking Regulatory Commission.
Bangladesh Bank has said that banks must provide 40% of their net outstanding loans to green and sustainable ventures in the private sector from 2025. The People’s Bank of China is set to prolong its provision of cheap credit to commercial lenders to fund green loans until at least 2027.
“China’s been pretty good in trying to push green funding,” Sheng said.
In India, the RBI has categorised renewable energy as a priority sector for lending.
“There’s enough recognition of the fact that the capital flowing from other countries to the developing countries is grossly insufficient and so our banks play an important role in prioritising renewable energy,” Tandon said.
However, she has her doubts about whether concessional loans are a good idea after support to farmers resulted in loans going bad. “It depends on what projects you’re lending to. Do we want to incentivise loans which are less commercially viable?” she asked.
Haedtler noted that investment in renewables will also be helped by more monetary easing, especially if Trump replaces Federal Reserve chair Jerome Powell.
“I expect that they will bring interest rates down further next year and that perhaps will become more aggressive once Trump replaces Powell as chair … regardless of whether or not it’s prudent, that will probably have some positive implications for the clean energy sector.”
Mobilise funds for multilateral development banks
Sheng supports the idea of mobilising funds for the multilateral development banks (MDBs) to help low- and middle-income countries adapt to climate change.
The African Development Bank (AfDB) and the Inter-American Development Bank (IDB) have proposed using high-income countries’ reserve assets – or special drawing rights (SDRs) – to increase the lending capacity of MDBs.
The AfDB and IDB noted that during the pandemic, the IMF allocated US$650bn worth of SDRs, but almost $400bn in SDRs sits idle on high-income countries’ balance sheets.
“The central banks need to understand that if they can print $7tn for Covid, why can’t they print $300bn for even this loss and damage issue,” Sheng said.
Loss and damage include the negative impacts from climate-related events, such as rising sea levels, desertification, increasingly extreme weather and climate-induced migration.
Boost international cooperation
Experts urge continued efforts to promote international coordination among central banks to green the financial system, even if the Trump presidency is a stalling factor.
“For four years the Fed will not be a cooperative international partner,” Haedtler said. “The debates are going to continue to happen at a global level even if the US is in this sort of deep freeze.”
European banks are likely to argue to the new EU commissioner for financial services, Maria Luis Albuquerque, that they are becoming less competitive than their US rivals due to tighter EU regulation, Symon said. “We see deregulatory trends,” she said. “We might see a race to the bottom rather than a race to the top.”
Integrate climate risks into insurance supervision
Haedtler predicts US state lawmakers will start implementing Treasury recommendations to integrate climate risk into insurance regulation.
“There will be progress in states like Colorado and California and Oregon and Washington, but it’s going to be a messy patchwork and it’s going to be turbulent for at least four years,” he said.
Insurance in the US is regulated on a state level, which means the federal government can only make recommendations. The increase in wildfires and flooding due to climate change has caused some insurance companies in states like California and Florida to stop issuing new policies and increase premiums.
Haedtler said Colorado might become the first state to require insurance companies to integrate into their underwriting the climate resilient investments that state and local governments have made.
However he also sees a general move to deregulate the insurance industry to entice more private insurers to come back to riskier markets.
“There is a big trend of privatising gains and socialising losses for insurers exposed to climate risk,” he said.
● Source – Green Central Banking
