The Network for Greening the Financial System (NGFS) has released its latest report, entitled “Adapting central bank operations to a hotter world”, which outlines specific options available to central banks to factor climate-related risks into their monetary policy operations.

Bundesbank Executive Board member Sabine Mauderer called the report a milestone. “It is feasible to factor climate-related risks into the framework for monetary policy operations. At the same time, doing so will be complex,” Mauderer said. To make climate-related adjustments, central banks will first need to overcome a range of practical and analytical challenges, including data gaps and data quality concerns.

Each central bank needs to decide for itself, on this basis, which of the specific measures are most compatible with its mandate, according to the report drawn up by the NGFS workstream Scaling up Green Finance, which is chaired by Mauderer. “Taking no action is not an option,” Mauderer insisted.

All in all, the report outlines nine specific options for central banks relating to the main policy fields of (1) credit operations, (2) collateral and (3) asset purchases.

They are assessed on the basis of four criteria: (1) consequences for monetary policy effectiveness, (2) contributions to mitigating climate change, (3) effectiveness as risk protection measures and (4) operational feasibility. The results of this analysis are presented using a colour-coding system, which should support central banks worldwide in their strategic decision-making, according to Mauderer.

In the report, the NGFS points out the consequences of climate change for the economy and the financial system and hence also for the conduct of monetary policy. Mauderer stressed that central banks ought to be aware of climate risks for the integrity of their balance sheets.

NGFS members and observers

The NGFS is a global network of central banks and supervisory authorities advocating a more sustainable financial system. It brings together 89 central banks and supervisors and 13 observers. Together, they represent five continents and around 75% of global greenhouse gas emissions. In December 2020, the US Federal Reserve also joined the network.