Net-zero central banking gathers momentum

It’s time for a coordinated international response from monetary and financial authorities

Driving down greenhouse gas emissions to net-zero is essential to minimising the threat of catastrophic climate change. Nearly 130 governments have now adopted or are considering net-zero goals, including in the European Union, the UK, China, Japan and the US. Leading banks and investors are also committing to align their portfolios with net-zero by 2050, including asset managers with some $32tn in assets and banks with a further $15tn in assets. As guardians of the financial system, central banks and supervisors are also starting to explore how they can support the net-zero transition.

There are two compelling reasons for financial authorities to take an explicit stance on net-zero. The first is that achieving a net-zero economy is simply the best way of minimising the risks of climate change to the stability of the financial system and the macroeconomy. The second is that central banks and supervisors need to ensure that their activities are coherent with net-zero government policy, which is now rapidly becoming a global norm.

As Frank Elderson, executive board member of the European Central Bank, and Sabine Mauderer, member of the executive board of the Deutsche Bundesbank, observed recently: ‘While we cannot take on the tasks of governments, we also cannot be mere bystanders in the transition to a net-zero economy.’

Over the past year, the first signs of net-zero central banking have started to emerge. Some central banks, such as the Banque de France, have included temperature goals in the way they manage their own asset portfolios. The Bank of England has launched a review into the climate impact of the issuers in its corporate bond purchase programme. This followed an updated statement of economic policy from the UK government, which now includes the goal of making the transition ‘to an environmentally sustainable and resilient net-zero economy’. More broadly, leading figures in the world of central banking are also recognising that key conventions, such as market neutrality, need to be modernised in light of the persistent market failures that cause climate change.

The proliferation of commitments to net-zero across the financial sector makes the need for a strategic response by central banks and supervisors more urgent rather than less. Markets respond to signals from central banks.

The financial architecture for net-zero is still being formed, with specific disclosure, assessment and governance tools under development. The efforts of central banks and financial authorities will be crucial in ensuring the consistency and credibility of net-zero financial efforts so that they reduce both institutional and system-wide climate risks.

To do this, a systematic approach is required (see figure 1). This begins with the need for central banks and supervisors to develop a net-zero roadmap including short-term actions and long-term expectations. Close liaison with policy-makers will be crucial to ensure that real economy and financial system interventions work as one. Retrofitting a country’s housing stock is a case in point, where building regulations, public finance and the prudential supervision of mortgage providers have to be aligned.

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