Written by Emma Thomasson
Some central banks, most notably in Europe and China, are working to address climate risks, but in countries like the US that are lagging behind, central banks are unlikely to correct for a lack of national decarbonisation policy, a new study shows.
The analysis of 47 countries from Harvard Business School’s Institute for Business in Global Society found that a central bank’s likelihood to take climate action depended on national politics rather than the country’s economic exposure to transition risks.
“So far, central banks complement, rather than act as a substitute for, regulatory or legislative policy to reduce fossil fuel dependence,” the study says.
It also explains that the findings might dash hopes of those who expect independent central banks to make up for a lack of climate policies in those countries that are not prioritising the issue.
“The results suggest that central banks may not be solely independent risk managers but also actors that respond to political demands. As such, central banks may reinforce national decarbonisation policy, while not correcting for the lack thereof,” it says.
The study, which covers countries from the Organisation for Economic Cooperation and Development (OECD) and G20, categorised the actions of central banks into those that “re-risk” carbon-intense activities to reduce dependence on fossil fuels, and those that “de-risk” economies by supporting climate change mitigation and adaptation.
The central banks that are re-risking and de-risking are mostly member states of the European Central Bank along with the UK and China, adopting policies such as stress testing requirements, purchasing green bonds or requiring climate risk disclosure of the financial institutions they oversee.
Green Central Banking publishes a scorecard of green policies and initiatives adopted by G20 central banks, which ranks European countries highly, along with Brazil and China.
Countries the Harvard study ranked as laggards in both re-risking and de-risking include the US, South Korea, Costa Rica, South Africa and Russia. Countries it said are more focused on re-risking than de-risking include Brazil, Switzerland and Sweden.
“The political nature of the management of climate risks raises concerns about unmanaged risks in the global economy, specifically stranded asset risks. These exist in economies with large oil and gas and/or financial sectors and low re-risking scores,” it says.
The study’s authors call for more transparency to build political pressure on laggards, for example by creating an index ranking central bank actions on climate risk management.
They also suggest that international organisations like the Bank for International Settlements or the Financial Stability Board could develop binding standards for climate risk management.
“International risk disclosure requirements for central banks could potentially incentivise greater risk management by central banks in countries that lack strong national decarbonisation policies,” they say.
●Source- Central Banking
