Central banks and the zero-carbon transition: an institutional challenge

Irrespective of their unique histories and specific institutional characteristics, central banks all over the world share enough in common to allow certain generalizations about them. They typically carry out three strategic roles simultaneously, acting both as the government's bank as well as the banks' bank while managing their economy's insertion into whatever international monetary system prevails at the time. The particular configuration of policy objectives in pursuit of this triple role has unfolded in distinct historic phases which most, if not all, central banks have gone through at the same time. As they are about to enter a new phase in their evolution, this one shaped by central banks' incorporation of the climate change challenge, it behoves us to locate where they are right now to identify what kind of institutional challenge they face to deal with this global systemic problem arguably located outside their purview. Central banks all over the world are currently engaged in an exploratory effort, coordinated to some degree among themselves as grouped together in the Network for Greening the Financial System (NGFS), to define new "rules of the game" how best to support the worldwide effort at a zero-carbon transition between now and mid-century. They are focusing in this endeavour on managing climate-specific risks as potential sources of financial instability, micro-prudential regulation of climate change (e.g. climate-related financial disclosure), macro-prudential regulation of climate change (e.g. climate stress tests), and "greening" of monetary policy by moving beyond traditional market neutrality to a melange of "green"-supporting and/or "brown"-penalizing incentives.