Just as there is no question that climate change brings enormous economic and financial risks, there should be no question that central banks can and must play a role in addressing this mother of all market failures. As central banks in the United States and Europe tighten credit to regain control of inflation, they should also use their supervisory and monetary-policy tools to catalyse and incentivise the transition to a carbon-neutral economy. Inaction is not an option, even if most central banks have not officially incorporated climate-risk management into their mandates.
Most central banks already accept that they will have to help navigate the transition to net-zero carbon emissions. Under new reporting rules established by the Bank of England, more than 1,300 of the largest UK-registered companies and financial institutions now must disclose "climate-related financial information". Similarly, the European Central Bank is encouraging climate-related disclosures by announcing that it will accept as collateral only assets that comply with its forthcoming Corporate Sustainability Reporting Directive.
