Green recovery: LSE and SOAS publish toolbox to steer central banks' coronavirus crisis response

There is "limited evidence" central banks are taking sustainability and climate change goals into account in their response to Covid-19, despite their steering role in shaping the economic recovery to the pandemic, a fresh anaysis has warned.

A report published today by LSE's Grantham Research Institute on Climate Change and SOAS' Centre for Sustainable Finance notes that there are a number of instruments at central banks' disposal that could be recalibrated to help tackle climate and sustainability-related financial risks.

Yet as things currently stand, monetary and financial authorities are not jumping at the chance to curb climate risks. The report reveals that just five of more than 170 central banking and supervisory crisis response policy instruments and adjustments "explicitly take sustainability considerations into account".

In the aftermath of the crisis, the report warns, many central banks have rushed to extend their collateral frameworks to include a broader variety and quality of assets, scaled up or introduced existing quantitative easing programmes, and introduced a number of targeted and non-targeted additional refinancing and purchase facilities.

These moves could not only slow the pace of the transition to a low carbon economy,  but could lead to a "significant additional build-up" of climate risk on the balance sheets of financial institutions, the financial system, and the global economy, the report authors warn.

As such, the academics have today set out a series of recommendations for how central banks and financial regulators could remedy this scarcity of sustainability ambition and avoid locking in a new wave of high-carbon infrastructure in the wake of the pandemic, proposing a raft of measures from amending collateral frameworks to adopting sustainable investment principles.

Ulrich Volz, director of the SOAS Centre for Sustainable Finance, said: "Central banks and supervisors should do whatever they can, within their mandate, to align their own Covid-19 crisis responses, as well as decision-making in the financial sector with the Paris climate goals. And there is no question that they have plenty of tools to do just that."

The toolbox published today aims to support state efforts to scale up sustainable finance in line with the Paris Agreement and the UN Sustainable Development Goals, while also minimising risks for regulated banks and helping ensure climate risks are accurately reflected in central banks' balance sheets and operations.

Lord Nicholas Stern, chair of the Grantham Research Institute on Climate Change, said there was a "strategic responsibility" to deliver a strong and sustainable recovery from the pandemic. "This guide shows how central banks and supervisors can play their part in ensuring that we come out of the crisis in a better position to tackle climate change and deliver sustainable development," he added.

The toolbox recommends banks and financial supervisors amend collateral frameworks to better account for environmental and climate change-related risks.

It suggests all asset purchases and financing operations are aligned to the Paris Agreements goals, and that prudential measures are adjusted in order "to avoid a manifestation of transition risks on the balance sheets of financial institutions".

Finally, the briefing urges central banks to adopt sustainable and responsible investment principles for portfolio management, including policy portfolios.

While the researchers warned they were unable to "identify any monetary or prudential policy crisis responses that have been calibrated in sustainability-enhanced ways" in its survey of the crisis response of more than 60 monetary and financial authorities, they pointed to some "positive examples" of monetary and financial authorities advancing a sustainability agenda.

These include the European Central Bank (ECB) decision in May to launch a public consultation on guidelines for addressing climate-related and environmental risks in and a report published the same month by the French Prudential Supervision and Resolution Authority that looked at good practice in governance and management of climate-related risks.

To reach their conclusions, the academics analysed Covid-19 crisis response measures taken by 66 monetary and financial authorities, all of whom operate in jurisdictions that are members of  central bank alliance the Network for Greening the Financial System.

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