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ANKARA
Climate change is no longer a ‘elephant in the room’ problem for central banks around the world, as some of them, realizing the need to expand their traditional mandates while also supporting sustainable development, have started to take concrete steps to encourage green financing.
Green finance is flourishing and is now seen as a decisive factor in managing the problems facing our planet, meeting the needs of both environmentalism and capitalism.
Working for a sustainable future, green finance is defined as any structured financial activity, product or service that will deliver better environmental results.
To that end, central banks around the world – perhaps best known for setting interest rates – should expand their monetary policy toolkits for a green and sustainable future.
Many analysts argue that central banks can promote green finance by changing their regulatory frameworks.
The past year has seen such initiatives, as for example the Bank of England providing details on an upcoming climate risk stress exercise for major UK banks and insurers, with a time horizon of 30 years.
On the continent, the European Central Bank (ECB) also outlined its prudential expectations related to the management and disclosure of climate-related risks by financial institutions.
He decided to create a new center on climate change to determine “objectives, policies and regulations†to support the transition to a carbon neutral economy.
The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has published a guide to help quantify how bank loan portfolios and balance sheets respond to climate risk.
In December, the US Federal Reserve – whose dollar decisions regularly fuel financial markets around the world – also joined the network.
Green recovery by-product
“This pandemic has heightened concerns about climate change, and it is also no surprise that the BCs have embraced it as well,” said Karlygash Kuralbayeva, professor of economics at King’s College London.
According to her, COVID-19 presented a golden opportunity to undertake not only a recovery but a green recovery.
“We have all heard this slogan ‘let’s build better’, and in this case, CBs will play an important role in monetizing fiscal investments undertaken by tax authorities. CBs will therefore play an important role in the process of all recovery. savings, â€she said.
“And if we are talking about green, that means they will play a role in green recoveries, as a by-product.”
Kuralbayeva pointed out that there are more specific ways for central banks and regulators to deal with climate change.
These include financial disclosures and climate scenario analyzes to calibrate and assess the climate risks facing financial sectors, she explained, noting that there are still challenges related to disclosures, such as the issue. key to quality.
Such exercises aim to quantify the response of bank loan portfolios and specific balance sheets to physical and transitional risk factors associated with climate change, she said.
Central banks should add a 4th policy objective: green finance
Most central bankers and policymakers have now understood that climate change is a threat to the stability of the financial system, according to Cevat Giray Aksoy, senior economist at the European Bank for Reconstruction and Development (EBRD).
According to Aksoy, central banks can use their soft power, in a low-cost, high-return exercise, to raise awareness of the risks of climate change and how it can potentially destroy the value of financial assets or drive up liabilities. .
Second, he added, globally, central banks should officially add a fourth policy goal, green finance, in addition to its traditional trio of price stability, financial stability and support for goals. broader economic policies such as exchange rate stability.
“Such a strong signal to the markets is essential, because a successful green transition is only possible if financial flows are aligned with climate change targets,” he said, warning that this cannot happen without a strong formal commitment from central banks.
He also suggested that central banks incorporate environmental sustainability goals into the management of their reserves and capital, citing the Bank for International Settlements (BIS), “the central bank of central banks,” as an example, which recently launched its second green bond fund. for central banks to support and encourage central banks.
“While such initiatives are promising, there is still a lot of uncertainty about adoption,” he said, explaining that this is mainly due to the fact that the current generation of central bankers have been trained to think within a framework of macroeconomic and financial stability, leaving little room for other objectives.
“In the midst of the pandemic, they can also [have to] ignore the threat of climate change, â€he said.
“I think financial and behavioral interventions are urgently needed for a green central bank.”
The impact of green transformation on developing countries
Guven Sak, Managing Director of the Turkish Economic Policy Research Foundation (TEPAV), approached the issue from a different perspective.
He said the green transition also has the capacity to become the new foreign policy perspective of the West, the EU and the US, warning that this could widen the already existing technological divide between the West and ” the rest “.
The European Commission and the ECB have said they want to drive a carbon neutral economy and will encourage financing in this area, making green transformation faster and easier, he added.
But, according to Sak, this process is probably not the same for developing countries, which face other fundamental economic problems, such as heavily indebted companies, distressed bank balance sheets and credit default swaps ( CDS) high.
“That is to say, it may take time for the green economy to take its turn in these countries,” he explained.
It seems that as an international mobilization for vaccines is underway, in the days to come, the same could be needed for green finance. And all stakeholders in the global economy should also be involved in efforts to achieve a sustainable and fairer future for all.
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