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Climate change and the Central Banks

Climate change is the biggest challenge of our time, writes Christine Lagarde, President of the European Central Bank (ECB). This summer we have seen heatwaves sparking devastating wildfires in Greece, Italy and Spain. And we have witnessed heavy rainfall leading to terrible flooding in Germany, Belgium, the Netherlands and Luxembourg.

But it’s not just Europe – we have seen events like these occurring all around the world. And experts agree that the magnitude and frequency of natural disasters will increase in the years to come. 

So global action is needed now. We all need to step up our efforts to tackle climate change, limit its impact and do what is necessary to reach the goals of the Paris Agreement. 

At the European Central Bank, we are committed to doing our part. The physical effects of climate change are already posing substantial challenges, which will become even more demanding in the future if not properly addressed in a timely manner. While the transition to a carbon-neutral economy is a great opportunity, it also implies some costs. This can affect growth, inflation, the economy and the financial system, both in the short term and over much longer horizons. 

Now is the time to address these challenges, bolster the resilience of the economy and the financial system, and ensure that we can seize the opportunities of the green transition and contribute to a better future. 

For us as a central bank, climate change has consequences for the pursuit of our primary mandate of price stability and our other areas of competence, including financial stability and banking supervision. Its impact requires us to take action on all fronts. 

We take climate risks into account when making out policy decisions

We have an ambitious action plan to include climate considerations in our monetary policy framework. 

For example, we will consider relevant climate-related risks when reviewing the valuation and risk control frameworks for assets mobilised as collateral by counterparties for Eurosystem credit operations. And we will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria – in line with our mandate. 

We will also conduct climate stress tests of the Eurosystem balance sheet to assess our risk exposure to climate change. To enable us to better assess these risks, we plan to introduce disclosure requirements for private sector assets as a new eligibility criterion or as a basis for the differentiated treatment of collateral and asset purchases. 

Finally, we will make sure that climate risks are well reflected in our macroeconomic projections and risk analysis. We will develop models that guide our understanding of the implications of climate change for the economy and the transmission of monetary policy. 

All of this will enable us to better incorporate climate change considerations into our monetary policy and make our asset purchases greener. 

We challenge banks to manage and disclose their climate risk

Looking at financial stability, we know from our economy-wide climate stress test that, without policies to transition to a greener economy, physical risks will increase over time. Euro area banks could be severely affected, potentially triggering financial instability over the next 30 years. 

As banking supervisors, we aim to ensure that banks are safe and sound and that they manage their climate risks effectively and disclose these risks adequately. We have issued a guide on our supervisory expectations of how banks should manage and disclose climate- related and environmental risks. We have asked banks for a self-assessment relating to our expectations and we are now in the process of discussing their action 

plans and next steps to address shortcomings. But we will not stop there. We will continue to challenge banks on their climate-related and environmental risk management and disclosure practices. And we will ensure that all banks are making progress in embedding these risks into their organisation, drawing on the full supervisory toolkit at our disposal, which includes both a thematic review and a supervisory climate risk stress test in 2022. 

Banks and the broader financial sector play a crucial role in financing the urgently needed green transition. They can steer credit to areas where it is most needed, 

such as environmental innovation and technology. And they could also bolster the process of adaptation by helping to ensure that economic activities are resilient to a changing climate. They have certainly started to grasp the opportunities of the green transition, but more still needs to be done. 

We need to work together to increase out impact

Cooperation is key to tackling climate change. International institutions, regulatory frameworks and joint commitments are an important catalyst to empower everyone to act. The Paris Agreement is a case in point. 

Together with 95 central banks and supervisors from all around the world, the European Central Bank is an active member of the Network for Greening the Financial System (NGFS). The NGFS defines and promotes best practices to strengthen the global response to the Paris Agreement and enhance the role of the financial system in mitigating climate risks and mobilising capital. By pooling our knowledge and experience in this forum, we can help each other contribute to combating climate change. Here and in many other international fora, we are working together on a global response. 

There is no time to waste. The challenges the world is already facing due to climate change will only increase over time. Within our mandate, we will continue to play our part and contribute to limiting its impact. We will include climate considerations in our monetary policy framework. We will keep challenging banks to manage and disclose their climate risk. And we will use the power of international cooperation to maximise our efforts – today, tomorrow and in the years to come. 

Climate change and the Central Banks

Climate change is the biggest challenge of our time. This summer we have seen heatwaves sparking devastating wildfires in Greece, Italy and Spain. And we have witnessed heavy rainfall leading to terrible flooding in Germany, Belgium, the Netherlands and Luxembourg.

But it’s not just Europe – we have seen events like these occurring all around the world. And experts agree that the magnitude and frequency of natural disasters will increase in the years to come. 

So global action is needed now. We all need to step up our efforts to tackle climate change, limit its impact and do what is necessary to reach the goals of the Paris Agreement. 

At the European Central Bank, we are committed to doing our part. The physical effects of climate change are already posing substantial challenges, which will become even more demanding in the future if not properly addressed in a timely manner. While the transition to a carbon-neutral economy is a great opportunity, it also implies some costs. This can affect growth, inflation, the economy and the financial system, both in the short term and over much longer horizons. 

Now is the time to address these challenges, bolster the resilience of the economy and the financial system, and ensure that we can seize the opportunities of the green transition and contribute to a better future. 

For us as a central bank, climate change has consequences for the pursuit of our primary mandate of price stability and our other areas of competence, including financial stability and banking supervision. Its impact requires us to take action on all fronts. 

We take climate risks into account when making out policy decisions

We have an ambitious action plan to include climate considerations in our monetary policy framework. 

For example, we will consider relevant climate-related risks when reviewing the valuation and risk control frameworks for assets mobilised as collateral by counterparties for Eurosystem credit operations. And we will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria – in line with our mandate. 

We will also conduct climate stress tests of the Eurosystem balance sheet to assess our risk exposure to climate change. To enable us to better assess these risks, we plan to introduce disclosure requirements for private sector assets as a new eligibility criterion or as a basis for the differentiated treatment of collateral and asset purchases. 

Finally, we will make sure that climate risks are well reflected in our macroeconomic projections and risk analysis. We will develop models that guide our understanding of the implications of climate change for the economy and the transmission of monetary policy. 

All of this will enable us to better incorporate climate change considerations into our monetary policy and make our asset purchases greener. 

We challenge banks to manage and disclose their climate risk

Looking at financial stability, we know from our economy-wide climate stress test that, without policies to transition to a greener economy, physical risks will increase over time. Euro area banks could be severely affected, potentially triggering financial instability over the next 30 years. 

As banking supervisors, we aim to ensure that banks are safe and sound and that they manage their climate risks effectively and disclose these risks adequately. We have issued a guide on our supervisory expectations of how banks should manage and disclose climate- related and environmental risks. We have asked banks for a self-assessment relating to our expectations and we are now in the process of discussing their action 

plans and next steps to address shortcomings. But we will not stop there. We will continue to challenge banks on their climate-related and environmental risk management and disclosure practices. And we will ensure that all banks are making progress in embedding these risks into their organisation, drawing on the full supervisory toolkit at our disposal, which includes both a thematic review and a supervisory climate risk stress test in 2022. 

Banks and the broader financial sector play a crucial role in financing the urgently needed green transition. They can steer credit to areas where it is most needed, 

such as environmental innovation and technology. And they could also bolster the process of adaptation by helping to ensure that economic activities are resilient to a changing climate. They have certainly started to grasp the opportunities of the green transition, but more still needs to be done. 

We need to work together to increase out impact

Cooperation is key to tackling climate change. International institutions, regulatory frameworks and joint commitments are an important catalyst to empower everyone to act. The Paris Agreement is a case in point. 

Together with 95 central banks and supervisors from all around the world, the European Central Bank is an active member of the Network for Greening the Financial System (NGFS). The NGFS defines and promotes best practices to strengthen the global response to the Paris Agreement and enhance the role of the financial system in mitigating climate risks and mobilising capital. By pooling our knowledge and experience in this forum, we can help each other contribute to combating climate change. Here and in many other international fora, we are working together on a global response. 

There is no time to waste. The challenges the world is already facing due to climate change will only increase over time. Within our mandate, we will continue to play our part and contribute to limiting its impact. We will include climate considerations in our monetary policy framework. We will keep challenging banks to manage and disclose their climate risk. And we will use the power of international cooperation to maximise our efforts – today, tomorrow and in the years to come. 

Climate change is the biggest challenge of our time. This summer we have seen heatwaves sparking devastating wildfires in Greece, Italy and Spain. And we have witnessed heavy rainfall leading to terrible flooding in Germany, Belgium, the Netherlands and Luxembourg.

But it’s not just Europe – we have seen events like these occurring all around the world. And experts agree that the magnitude and frequency of natural disasters will increase in the years to come. 

So global action is needed now. We all need to step up our efforts to tackle climate change, limit its impact and do what is necessary to reach the goals of the Paris Agreement. 

At the European Central Bank, we are committed to doing our part. The physical effects of climate change are already posing substantial challenges, which will become even more demanding in the future if not properly addressed in a timely manner. While the transition to a carbon-neutral economy is a great opportunity, it also implies some costs. This can affect growth, inflation, the economy and the financial system, both in the short term and over much longer horizons. 

Now is the time to address these challenges, bolster the resilience of the economy and the financial system, and ensure that we can seize the opportunities of the green transition and contribute to a better future. 

For us as a central bank, climate change has consequences for the pursuit of our primary mandate of price stability and our other areas of competence, including financial stability and banking supervision. Its impact requires us to take action on all fronts. 

We take climate risks into account when making out policy decisions

We have an ambitious action plan to include climate considerations in our monetary policy framework. 

For example, we will consider relevant climate-related risks when reviewing the valuation and risk control frameworks for assets mobilised as collateral by counterparties for Eurosystem credit operations. And we will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria – in line with our mandate. 

We will also conduct climate stress tests of the Eurosystem balance sheet to assess our risk exposure to climate change. To enable us to better assess these risks, we plan to introduce disclosure requirements for private sector assets as a new eligibility criterion or as a basis for the differentiated treatment of collateral and asset purchases. 

Finally, we will make sure that climate risks are well reflected in our macroeconomic projections and risk analysis. We will develop models that guide our understanding of the implications of climate change for the economy and the transmission of monetary policy. 

All of this will enable us to better incorporate climate change considerations into our monetary policy and make our asset purchases greener. 

We challenge banks to manage and disclose their climate risk

Looking at financial stability, we know from our economy-wide climate stress test that, without policies to transition to a greener economy, physical risks will increase over time. Euro area banks could be severely affected, potentially triggering financial instability over the next 30 years. 

As banking supervisors, we aim to ensure that banks are safe and sound and that they manage their climate risks effectively and disclose these risks adequately. We have issued a guide on our supervisory expectations of how banks should manage and disclose climate- related and environmental risks. We have asked banks for a self-assessment relating to our expectations and we are now in the process of discussing their action 

plans and next steps to address shortcomings. But we will not stop there. We will continue to challenge banks on their climate-related and environmental risk management and disclosure practices. And we will ensure that all banks are making progress in embedding these risks into their organisation, drawing on the full supervisory toolkit at our disposal, which includes both a thematic review and a supervisory climate risk stress test in 2022. 

Banks and the broader financial sector play a crucial role in financing the urgently needed green transition. They can steer credit to areas where it is most needed, 

such as environmental innovation and technology. And they could also bolster the process of adaptation by helping to ensure that economic activities are resilient to a changing climate. They have certainly started to grasp the opportunities of the green transition, but more still needs to be done. 

We need to work together to increase out impact

Cooperation is key to tackling climate change. International institutions, regulatory frameworks and joint commitments are an important catalyst to empower everyone to act. The Paris Agreement is a case in point. 

Together with 95 central banks and supervisors from all around the world, the European Central Bank is an active member of the Network for Greening the Financial System (NGFS). The NGFS defines and promotes best practices to strengthen the global response to the Paris Agreement and enhance the role of the financial system in mitigating climate risks and mobilising capital. By pooling our knowledge and experience in this forum, we can help each other contribute to combating climate change. Here and in many other international fora, we are working together on a global response. 

There is no time to waste. The challenges the world is already facing due to climate change will only increase over time. Within our mandate, we will continue to play our part and contribute to limiting its impact. We will include climate considerations in our monetary policy framework. We will keep challenging banks to manage and disclose their climate risk. And we will use the power of international cooperation to maximise our efforts – today, tomorrow and in the years to come. 

About the author

Christine Lagarde became President of the European Central Bank (ECB) in 2019. From 2011 until 2019 she was Managing Director of the International Monetary Fund (IMF), the first woman to hold that position. She started her career as a lawyer as an associate with the international law firm of Baker & McKenzie. She became a member of the Executive Committee of the Firm in 1995 and became Chair of the Global Executive Committee in 1999 and subsequently chair of the Global Strategic Committee in 2004.

She has held senior ministerial French governmental posts, including Minister of Foreign Trade (2005–2007), Minister of Agriculture and Fishing (2007) and Minister of the Economy, Finance and Industry (2007–2011).

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