The nature of climate change impacts and mitigation strategies means that central banks must go beyond risk management and take on the additional role of helping to coordinate measures to fight climate change, a group of specialists have argued in a new book published by the Bank for International Settlements (BIS) today.

Forward-looking risk assessment approaches grounded in scenario-based analyses, which were the manifestation of an “epistemological break” beginning to take place in the financial community, were important but would not cut it, they said.

And yet central banks could neither sit on their hands and “wait for other government agencies to jump into action” nor replace other government and private actors to compensate for their insufficient action, they* wrote in Green Swan, a joint effort from Banque de France and BIS.

“To overcome this deadlock, a second epistemological break is needed: central banks must become more proactive in calling for broader and coordinated change, in order to continue fulfilling their own mandates of financial and price stability over longer term horizons than those traditionally considered,” they said.

This new role could be thought of as contributing to coordination to combat climate change, which the authors said they had dubbed the five Cs.

Central banks needed to coordinate their own actions with a broad set of measures to be implemented by others, such as governments, the private sector, civil society and the international community.

“This coordination task is urgent since climate-related risks continue to build up and negative outcomes could become irreversible,” the authors wrote. “There is an array of actions to be consistently implemented.

“The most obvious ones are the need for carbon pricing and for systematic disclosure of climate-related risks by the private sector.”

The values benefit

Other potential actions included “proactively promot[ing] long-termism by supporting the values or ideals of sustainable finance in order to ‘break the tragedy of the horizon’”.

“The main benefit of promoting a sustainable finance approach, including through ESG, may lie in broadening the set of values driving the financial sector” 

‘Green Swan’ authors

“The main benefit of promoting a sustainable finance approach, including through ESG, may actually not lie in the greater impetus for asset managers to reduce their exposure to climate-related risks, but rather in broadening the set of values driving the financial sector,” the specialists argued.

Other additional actions included exploring new policy mixes and integrating sustainability into accounting frameworks at the corporate and national level.

All in all, the new co-ordinating role for central banks would require “thinking concomitantly within three paradigmatic approaches to climate change and financial stability: the risk, time horizon, and system resilience approaches,” the authors said.

*The book was authored by Patrick Bolton, a business professor at Columbia University and visiting professor at Imperial College London; Morgan Després, deputy head of the financial stability department at Banque de France and head of the secretariat for the Network for Greening the Financial System; Luiz Awazu Pereira da Silva, deputy general manager of the BIS; Frédéric Samama, head of responsible investment at Amundi; and Romain Svartzman, economist at Banque de France. A pdf of the book can be found on the BIS website.

 

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