The traditional view of central banks’ role no longer appears to align with government objectives and the public’s growing desire to address climate change.
The effect of climate change on central banks’ core functions can be clear, e.g. droughts often result in higher food prices and threaten price stability. Furthermore, the general shortcoming in climate-risk disclosures results in sub-optimal investment allocations amid a significant investment gap.
Modern central banks face numerous challenges when it comes to addressing climate change, ranging from preventing “mandate creep” to implementing the most appropriate, effective policies.
The steps that central banks should take, including stress testing, ensuring adequate capital buffers, and monitoring institutions’ capital allocations, can support the evolution in monetary policy needed to meet the world’s broadening objectives to fight climate change.