Central Banking, Climate Change, and Green Finance

Abstract

Responsibility for financial and macroeconomic stability implicitly or explicitly lies with the central bank, which therefore ought to address climate-related and other environmental risks on a systemic level. Furthermore, central banks, through their regulatory oversight over money, credit and the financial system, are in a powerful position to support the development of green finance models and enforce an adequate pricing of environmental and carbon risk by financial institutions. The central topic of this chapter are the public financial governance policies through which central banks, as well as other relevant financial regulatory agencies, can address environmental risk and promote sustainable finance. The chapter first discusses the reasons why central banks should be concerned with aligning finance with sustainable development. Second, the chapter reviews the tools and instruments that can be utilized by central banks and financial regulatory agencies to address environmental risk and promote green finance and sustainable development. Third, the chapter provides a brief review of green public financial governance initiatives.

Keywords

JEL Classifications

Appendix 1: Sustainable Finance Policies

	Brazil
2008	Banco Central do Brasil: Starting in 2008, resolutions issued on environmental regulation, restricting lending to firms that operate in vulnerable geographic areas such as the Amazonas region (Resolution 3,545/2008, Resolution 3,813 Resolution 3,896/2010 and Resolution 4,008/2011)
2009	Brazilian Banking Association: Voluntary green finance guidelines adopted by commercial and state-owned banks
2011	Banco Central do Brasil: Resolution 3,988 incorporates risk of exposure to environmental damages into “Internal Process of Capital Adequacy Assessment” (ICAAP) requirements
2014	Banco Central do Brasil: Guidelines on “Social and Environmental Responsibility for Financial Institutions” discusses and defines E&S risk exposure
	Bangladesh
2008	Bangladesh Bank: Circular on “Mainstreaming Corporate Social Responsibility in Banks and Financial Institutions in Bangladesh”
2011	Bangladesh Bank: “Policy Guidelines for Green Banking” and “Guidelines on Environmental Risk Management”
2015	Bangladesh Bank: Mandatory Green Finance Credit Targets l
2016	Bangladesh Bank: “Integrated Risk Management Guidelines for Financial Institutions”
2017	Bangladesh Bank: Guidelines on Environmental & Social Risk Management for Banks and Financial Institutions
	Canada
2014	Toronto Stock Exchange and CPA Canada: “A Primer for Environmental and Social Disclosure Ontario” Ministry of Finance: Regulation 235/14, amending the Pension Benefits Act and requiring pension plan administrators to disclose whether and if E&S risk factors are incorporated
2017	Green Ontario Fund created as government agency that invests proceeds from Ontario’s carbon market into the reduction of greenhouse gas emissions
	People’s Republic of China
2007	China Banking Regulatory Commission (CBRC), People’s Bank of China (PBOC), and Ministry of Environmental Protection (MEP): Green Credit Policy (“Opinions on Enforcing Policies and Regulations on Environmental Protection to Prevent Credit Risk”) MEP and China Insurance Regulatory Commission (CIRC): Green Insurance Policy (“Guiding Opinions on Environmental Pollution Liability Insurance”)
2008	China Securities Regulatory Commission (CSRC) and MEP: Green Securities Policy (“Guidance Opinions on Strengthening the Oversight of Public Companies”) Shanghai Stock Exchange: Shanghai CSR Notice and Shanghai Environmental Disclosure Guidelines
2009	Shenzhen Stock Exchange: Social Responsibility Instructions to Listed Companies
2012	CBRC: Green Credit Guidelines
2013	MEP and CIRC: “Guiding Opinions on Implementing the Pilot Programs of Compulsory Environmental Pollution Liability”
2014	CBRC: Green Credit Monitoring & Evaluation mechanism and Key Performance Indicators Checklist PBOC: Green Finance Task Force MEP and CIRC: “Guiding Opinions on Pilot Scheme for Compulsory Environmental Pollution Liability Insurance”
2015	PBOC: Green Financial Bond Directive and Green Bond-Endorsed Project Catalogue for Bonds Issued by Financial Institutions and Corporations PBOC: Green Finance Committee
2016	PBOC: Guidelines for Establishing the Green Financial System NDRC and Shanghai Stock Exchange: Green Bond Guidelines China Bond Green and Climate-Aligned Bond Index
2017	State Council: Establishment of five green finance pilot zones in Zhejiang, Jiangxi, Guangdong, Guizhou and Xinjiang MEP and CSRC: Environmental Disclosure for Listed Companies CSRC: Guidelines for Green Bond Issuance by Listed Companies MEP and CIRC: Draft Guideline on Environmental Pollution Liability Insurance Shanghai’s Lujiazui Financial City: Lujiazui Standard of Green Finance
2018	CSRC and MEP: Mandatory ESG disclosures for listed companies and bond issuers by 2020
	Hong Kong, China
2016	Securities and Futures Commission: Principles of Responsible Ownership Financial Services Development Council: Report on “Hong Kong as a Regional Green Finance Hub”
2018	Hong Kong Quality Assurance Agency: Green Finance Certification Scheme
	France
2001	French National Assembly: Passes the New Economics Regulation law and introduces the reporting requirements on ESG issues as part of a broader framework on “ethical” aspect of financial practices
2010	French National Assembly: Passes the “Grenelle II” law, outlining the national commitment in favour of the environment, as well as environmental reporting requirements for asset managers
2015	French National Assembly: Passes Law on Energy Transition for Green Growth (ETGG), outlining procedures for the assessment of climate-related risks and addressing the role of the financial sector in the green transition
2017	Banque de France: Launches Network for Greening the Financial System (NGFS) for the sharing of experiences of the supervisory dimensions of climate- related and environmental risks and green finance
	India
2007	Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting—Role of Banks
2011	Ministry of Corporate Affairs: National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business
2012	Securities and Exchange Board of India (SEBI): Annual Business Responsibility Reporting
2014	SEBI: Infrastructure Investment Trusts (InvIT) Regulations
2015	Reserve Bank of India: Priority Sector Lending—Targets and Classification Indian Banks Association: National Voluntary Guidelines for Responsible Financing
2016	SEBI: Guidelines for the Issuance and Listing of Green Bonds
2017	SEBI: Disclosure Requirements for Issuance and Listing of Green Bonds
	Indonesia
2012	Bank Indonesia: Green Lending Model Guidelines for Mini Hydro Power Plant Projects Government Regulation on Social and Environmental Responsibility of Limited Liability Companies
2014	Otoritas Jasa Keuangan (OJK) / Financial Services Authority: Roadmap for Sustainable Finance in Indonesia 2015–2019
2015	IFC, USAID, OJK: Clean Energy Handbook for Financial Service Institutions
2017	OJK: Framework and regulation for green bond issuance in Indonesia OJK: Regulation on the Application of Sustainable Finance for Financial Services Companies, Issuers and Publicly Listed Companies
	Japan
2012	Ministry of the Environment: Principles for financial action towards a sustainable society
2014	Financial Services Agency: Japan Stewardship Code
2015	Tokyo Stock Exchange: Corporate Governance Code and Infrastructure Fund Market
2017	Ministry of the Environment: Green Bond Guidelines
	Kenya
2015	Kenya Bankers Association (KBA): Sustainable Finance Initiative (SFI) Guiding Principles
2017	KBA, Central Bank of Kenya, Capital Markets Authority and the National Treasury: Green Bond Programme
	Republic of Korea
2008	Government launches Republic of Korea’s Green Growth Strategy and provides a strategic policy framework
2009	Ministry of Strategy and Finance and Financial Services Commission: Announce a certification system to verify green projects and companies’ eligibility for funds under government’s plans to promote investment into green industries
2013	Export-Import Bank of Korea: First financial institution in Asia to issue green bonds
2017	Korea Development Bank: Issuance of green bonds worth 300 million USD, using proceeds to finance or refinance investments in renewable energy projects, low carbon emission technology and green transportation
	Mongolia
2014	Bank of Mongolia & Mongolia Banking Association: Mongolia Sustainable Finance Principles and Sector Guidelines
	Netherlands
2014	De Nederlandsche Bank: Central Bank mandate updated to include “sustainable prosperity” and “financial stability,” as well as equipping the DNB with new macroprudential instruments and tools to fullfil the task
2017	Dutch Pensions Federation: Declaration to create an environmental, social and governance (ESG) covenant for pension funds
	De Nederlandsche Bank: Organises workshop on “Central Banking and Green Finance”
2018	De Nederlandsche Bank: Organises International Climate Risk Conference for Supervisors
	Philippines
2008	Government of Philippines: National Disaster Risk Reduction and Management Law
2011	Securities and Exchange Commission: Corporate Governance Guidelines for Companies Corporate Responsibility Act updated
2015	Government of Philippines: Joint Catastrophe Risk Insurance Facility for Governments (Local Government Units Pool)
	Singapore
2010	Singapore Stock Exchange (SGX): “Guide to Sustainability Reporting for Listed Companies”
2015	Association of Banks in Singapore: Guidelines on Responsible Financing
2017	Monetary Authority of Singapore: Green Bond Grant Scheme
	South Africa
2011	Institute of Directors in Southern Africa: “Code for Responsible Investing in South Africa (CRISA)”
2015	Banking Association South Africa: Principles for Managing Environmental and Social Risk
2017	Johannesburg Stock Exchange: Green Bond listing requirements and creation of Green Bond Segment
	Thailand
2008	Stock Exchange Thailand and Securities and Exchange Commission of Thailand: Guidelines for Sustainability Reporting
2014	Stock Exchange Thailand: CSR Reporting Requirements Securities and Exchange Commission of Thailand: Sustainability Development Roadmap for Listed Companies
	Turkey
2014	Banks Association of Turkey: Sustainability Guidelines for the Banking Sector
2015	Borsa İstanbul: ESG Reporting Guide
	United Kingdom
2012	London Stock Exchange: Mandatory Disclosure of Carbon Emissions for Listed Companies
2015	Bank of England: Governor Mark Carney highlights the Bank’s view on climate change
	Prudential Regulation Authority (PRA): Report on the impact of climate change on the UK insurance sector
2016	Bank of England: Publishes further research on climate change and central banks and organizes workshops and conferences on the subject of climate risks and financial stability; co-chairs the G20 Green Finance Study Group
	Viet Nam
2015	State Bank of Vietnam (SBV): Directive on Promoting Green Credit Growth and Managing Environmental and Social Risks in Credit Extension SBV: Action Plan of Banking Sector to Implement the National Green Growth Strategy until 2020
2016	SBV: Circular on lending transactions of credit institutions and/or foreign bank branches with customers
2017	SBV: Renewed commitment to implementing the Green Growth program and the program of preventing climate change

1. Source: Compiled by authors, drawing on Volz (2018)