The Bank of England’s Sarah Breeden said central banks must focus on climate change as she backed a new study calling on global financial regulators to adopt "clear" green strategies to support the economic transition to net-zero.
Ms Breeden, executive director of UK deposit takers supervision at the BoE and executive sponsor for climate change, said the sooner central banks start the process “the smoother the path to net zero", with fewer economic costs and financial risks incurred along the way.
“We are all clear that we should think about net zero as we go about doing our central banking jobs - the interesting question then is how we go about doing it,” Ms Breeden told a webinar hosted by the London School for Economics on Friday.
The new report - Net Zero Central Banking: A New Phase in Greening the Financial System -from the Grantham Research Institute on Climate Change and the Environment, the London School of Economics and the Centre for Sustainable Finance, urged central banks, including the BoE, to deliver a net-zero roadmap to confront the risks of climate change.
While the first signs of financial authorities starting to align their operations with net-zero are beginning to emerge, the report noted, a systematic approach is now required.
"As guardians of macroeconomic and financial stability, central banks and supervisors now need to introduce explicit strategies to support the transition to net zero," the report said.
“The rationale for central banks and supervisors is two-fold: first, achieving a net-zero economy is the best way of minimising the risks of climate change to the stability of the financial system and the macro economy; and second, central banks and supervisors need to ensure that their activities are coherent with net-zero government policy."
While many countries including the UK have now set net-zero targets ahead of the Cop26 United Nations environmental summit, to be held in Glasgow in November, many central banks have failed to outline how they will ensure “their activities are coherent” with their government’s decarbonisation policies.
Co-author of the report Nick Robins, professor in practice – sustainable finance at the Grantham Research Institute, said to limit global warming to 1.5°C global net human-caused emissions of carbon dioxide need to fall about 45 per cent from 2010 levels by 2030, reaching net zero by about 2050.
Mr Robins said central banks must integrate climate change into monetary frameworks to account for its impact on economic outcomes, with signals that some central banks are already aligning their activities with net zero.
“In the run-up to Cop26, this is the moment for central banks and supervisors to start really setting out how they will support the transition for the next financial system," he said.
"Clearly each central bank and supervisor has developed their own approach based on their mandate."
In June last year, the BoE published a report disclosing climate-related financial risks across all its operations, including how it was managing them - the first time any central bank had disclosed climate-related risks associated with its monetary policy portfolio.
Ms Breeden said acting in a way that is coherent with government policy “is very real for the BoE right now”.
The UK was the first G20 country to set net-zero targets for 2050, while UK finance minister Rishi Sunak's budget statement earlier this month included plans to change the remit of the BoE's Monetary Policy Committee.
Mr Sunak said the remit must "reflect the government's economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net-zero economy".
In response, the BoE said it will provide more information on “adjusting the Corporate Bond Purchase Scheme to account for the climate impact of the issuers of the bonds we hold”.
The move was welcomed by green campaigners who criticised the bank last year for including bonds issued by energy companies and other businesses with significant greenhouse gas emissions in asset purchase programmes designed to support the economy.
Mr Bailey defended that decision last year by saying prioritising Covid ahead of climate change was the "right response in the face of such an emergency".
Ms Breedon said while the BoE’s corporate bond portfolio is “small” at £20 billion ($27.89bn), the lender is “trying to develop an approach that if it were applied across the financial system as a whole ... it would drive the outcomes that we wish to see”.
“It's not enough just to buy green, we need to support the economy wide transition to net zero,” she said.
The new report urged central banks including the BoE, the Bank of France, the European Central Bank and the US Federal Reserve System, to work together on their net-zero strategies.
However, Ms Breeden said there is “a tough balancing act between the need for international co-ordination and the need for urgent action” because “international co-ordination takes time”.
“We'll do our very best to manage that challenge, but it isn't going to be easy,” she said.
The report said investment practices for central banks' portfolios should include a net-zero target, with each lender publishing a transition plan to achieve the goal, while also assessing the potential effect of that shift on livelihoods.
It also called for climate risk reporting guidelines for investors and businesses, such as the disclosure frameworks set out by the Taskforce on Climate-related Financial Disclosure, to be upgraded to factor in net-zero targets more effectively.
"As more and more governments adopt net zero policies, prudential and monetary authorities will have a crucial role in translating financial sector leadership into universal practice across the financial system,” the report said.
"Markets respond to signals from central banks, and the seriousness of intent with which they consider net-zero targets is likely to have a profound bearing on financial market decisions that will ultimately determine capital formation and, thus, the carbon trajectory of the economy."