The costs of inaction on climate change are rising. The stakes are high, including risks to financial stability. Central banks are increasingly engaging in the debate. Their mandates, interpretations, and sense of urgency vary. In this analysis, we review how far central banks have come and what to expect in the coming years. Our conclusion is that central banks both should and will step up research and regulations to combat climate change. Both action and inaction will influence financial systems significantly.

Central bank leaders and laggards

Mark Carney, the governor of the Bank of England (BoE), was the first to talk about the financial implications of climate change and the risks they bring about in his famous “tragedy of the horizon” speech (Bank of England, 2015). The BoE remains one of the most active central banks in this respect, although it has been joined by others. Last year, the ECB become more vocal on the issue and joined the Network for Greening the Financial System (NGFS), established a year earlier. The Swedish Riksbank joined in December 2018. The first progress report by NGFS members (currently 26 central banks and regulatory authorities globally) acknowledges climate-related risks as a source of financial risk and affirms that addressing these risks is within the mandates of central banks and supervisors to ensure resiliency of the financial system (NGFS, 2018).

The debate is now shifting more to what central banks and regulators should do and how much lies within their mandates. Among the major central banks, the Federal Reserve is probably the only notable exception; it has not engaged in any of these activities. Early this year, four former chairs of the Federal Reserve (Yellen, Bernanke, Greenspan, and Volcker) joined leading US economists in an unprecedented call for a carbon tax in the US, warning about the risks of climate change and urging immediate action (Climate leadership council, 2019).

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