Green central banking

Central banks are important actors in the transition towards net zero for three reasons. First, they can manage risks to the financial system and the economy as a whole that arise because of climate change. Second, central banks have themselves become market actors and can help to channel funds into sustainable investments in order to finance the green transformation. Third, they share their expertise to encourage behavioural changes. Measures undertaken by central banks to address these issues are commonly referred to as 'green central banking'.

In July 2021, the European Central Bank (ECB) presented a climate action plan, which announced measures to include climate change considerations in its operations. The ECB set out the consequences of the climate action plan for its monetary policy operations in July 2022. The measures are far-reaching and imply a paradigm shift. They include revisions to the corporate sector purchase programme and the collateral framework.

This briefing explores the actions the ECB announced under its climate action plan and compares them to the actions taken by two of its central bank peers: the US Federal Reserve System and the Bank of England. As central banks are subject to their legal provisions, the briefing commences with a discussion of the central banks' legal mandates. The comparison is then organised in four sections: (i) the conduct of monetary policy, (ii) prudential regulation, (iii) data and modelling, and (iv) how central banks can lead by example. An outlook on important developments in green central banking and the future impact of climate change on inflation concludes the briefing.