SOAS University of London

Central banks must play clear role in reaching goal of net zero greenhouse gas emissions to tackle climate change

15 March 2021

Central Banks, including the Bank of England, the Banque de France, the European Central Bank and the United States Federal Reserve System, must each have an explicitly strategy for helping countries to achieve net-zero emissions, according to a report published today (15 March 2021) jointly by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and the Centre for Sustainable Finance at SOAS, University of London.

The report on ‘Net-zero central banking: A new phase in greening the financial system’, by Professor Nick Robins, Dr Simon Dikau and Dr Ulrich Volz, argues that “achieving a net-zero economy is the best way of minimising the risks of climate change to the stability of the financial system and the macroeconomy”. It calls for central banks to introduce explicit strategies to support the economic transition to net-zero emissions.

The report notes that many countries have now set targets for reaching net zero emissions of carbon dioxide and other greenhouse gases ahead of the COP26 United Nations climate change summit, due to be held in Glasgow, Scotland, between 1 and 12 November 2021.

It states that central banks “need to ensure that their activities are coherent with net-zero government policy”, and recommends that they “consistently integrate climate change into monetary frameworks and models to adequately account for the impacts of climate change on macroeconomic outcomes”.

Earlier this month, the UK Chancellor of the Exchequer, Rishi Sunak, changed the remit of the Bank of England’s Monetary Policy Committee to “reflect the government’s economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy”.

The new report also recommends that “investment practices for central banks’ portfolios should include a net-zero target and central banks should each publish a transition plan to achieve this”. It calls for central banks to “explore the implications of net-zero for jobs and livelihoods to mitigate potential downside sectoral and regional consequences”.

The authors suggest that the framework created by the Taskforce on Climate-related Financial Disclosures should be strengthened to take account of net-zero targets.

The report concludes: “As guardians of macroeconomic and financial stability, central banks and supervisors now need to introduce explicit strategies to support the transition to net-zero. As more and more governments adopt net-zero policies, prudential and monetary authorities will have a crucial role in translating financial sector leadership into universal practice across the financial system.”

It adds: “Markets respond to signals from central banks, and the seriousness of intent with which they consider net-zero targets is likely to have a profound bearing on financial market decisions that will ultimately determine capital formation and, thus, the carbon trajectory of the economy.”

The report, which was funded by the European Climate Foundation, will be formally launched at a virtual event on 19 March, the details of which can be accessed here.