SOAS University of London

Europe’s Central Banks Need to be More Aligned with Climate Neutrality Target

24 May 2021

The European Central Bank and its counterparts in the member states of the European Union need to adopt a strategic approach to the achievement of “climate neutrality”, according to a report published 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 ‘Climate-neutral central banking: How the European system of central banks can support the transition to net-zero’, by Simon Dikau, Nick Robins and Ulrich Volz, points out that the European Union is a “long-standing climate leader”, and that the European Green Deal “recognises sustainable finance as key for mobilising the necessary capital”.

The report calls for the European System of Central Banks (ESCB), with the European Central Bank (ECB) at its helm, to “mainstream net-zero” across all its operations to align them with the climate neutrality targets of the European Union and the member states.

The authors write that “net-zero is the best way of minimising the risks of climate change to the stability of the EU economy and financial system”, and that “EU central banks and supervisors need to ensure that their activities are coherent with the EU’s and member states’ climate neutrality policies”.

The report recommends that the ECB should update its mission to include the European Union’s target for climate neutrality. The Bank is carrying out a review of its monetary policy strategy.

The report states: “The ESCB needs to consistently integrate climate neutrality into monetary frameworks and models to adequately account for the impacts of climate change on macroeconomic outcomes. In addition, central bank instruments and policy portfolios need to become operationally aligned with net-zero.”

The report recommends that “prudential supervisors in the EU should make climate neutrality a core element of supervisory practice at micro and macro levels, aligning supervisory expectations and prudential instruments with net-zero”. It adds: “This would involve requiring all regulated financial institutions to submit net-zero transition plans. Prudential capital requirements should also reflect financial institutions’ exposure to climate risks.”

The report states: “Sustainable and responsible investment practices in all European central bank portfolios should include a climate neutrality target, and central banks should each publish a transition plan to achieve this”.

Among the report’s other recommendations are that central banks should “assess the implications of net-zero for jobs and livelihoods and explore policy options to mitigate potential downside sectoral and regional consequences”.

The report is available to download.

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