Plans by central banks to escalate monetary policy measures to tackle climate-related financial risks may have to be revisited to consider their utility in the current raised interest rate environment, according to the Network for Greening the Financial System (NGFS).
Many central bank members of the group had implemented “a cautious and gradual approach”, with some signalling that their action will escalate, particularly as they learn more about how such action might lead to “trade-offs”, the NGFS said in Adapting central bank operations to a hotter world: current progress and insights from practical examples.
However, the usefulness of measures such as purchases of assets based on their climate credentials may have waned since interest rates have risen in the last three years and purchasing programmes have been paused to tame price rises, the NGFS’ progress update said.
“Further work may be needed to better understand how to best integrate climate considerations into monetary policy operations during periods when interest rates are above the ‘zero lower bound’,” it said, referring to a situation whereby interest rates are at or near zero to stimulate growth.
The report does not provide detail on the tools that central banks may want to use when interest rates are high but said this “may be a useful focus for future work,” including for the NGFS.
It also notes that how climate factors, such as changes in carbon prices, their effect on energy prices, and how this in turn affects monetary policy, as well as the impacts of increased frequency of extreme weather events, could also benefit from further research.
The report also includes eight case studies of work by NGFS members, spanning credit operations, asset purchases, and collateral policies.
“The case studies demonstrate that while practical challenges remain, they can be overcome,” it said.
“Many of the measures that central banks have taken over the last years were originally deemed to face meaningful operational challenges.
“The fact that several central banks have managed to implement a wide range of measures suggests that operational challenges may be more manageable than initially expected.
“That said, the number of central banks having taken action is still limited, in particular in the context of actively protecting their own balance sheet against climate-related financial risks.”
Central banks “found pragmatic solutions” to plug gaps in data, for example on greenhouse gas emissions of corporates, and have constructed climate scores for issuers “to capture several dimensions of an issuer’s climate performance”.
Where they have been unable to obtain GHG emissions or other forms of raw climate data, they can also rely on third-party assessments, such as green bond labels, or self-assessments by their counterparty, the report added.
The NGFS group of central banks and supervisors was launched in 2017 to share best practices and brings together 141 central banks and supervisors and 21 observers. It is chaired by Sabine Mauderer, member of the executive board of the Deutsche Bundesbank and the NGFS secretariat is provided by Banque de France.
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