Central Banks' Role In Scaling Down Impact of Climate Change

Published on: 08 March 2022
by KnowESG
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A Brief Summary

The impact of climate change will exacerbate in the coming decades. If there is a lack of worldwide coordinated action and implementation of additional far-reaching measures for fighting climate change, the risk is estimated to be even bigger than expected. Central banks, from one side, have a significant role to play in reducing climate change.

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Central banks can help facilitate the transition to a zero-emission world directly by adjusting their asset purchase programme by taking climate-focused best practices into account or indirectly through their supervisory measures.

Under the supervisory measures, the main policy instrument is specific stress tests for identifying climate change risks faced by banks.

The European Central Bank (ECB) has already started the stress tests. The progress of this test is expected in June 2022. The intention is to initiate a dialogue with banks regarding the necessary steps that have to be taken related to loan portfolio and governance issues.

The ECB might extend its traditional mandate and include more to facilitate achieving goals of reducing banks' exposure to climate change.

'On the other hand, commercial banks play a crucial role in reducing emissions by adjusting their loan portfolio following emission cutting activities.

The sectors of the Cyprus economy, such as construction and tourism, will require more capital to adjust to the new market regulations. The important elements of such investments have come to be known under the name of cyclical economy and involve the utilisation of renewable energy and environmentally friendly raw materials.

The total public and private investment needed is estimated to be around a minimum of 3 per cent of global GDP.

Climate change will not vanish over the night. However, it will require timely actions by the government and radical adjustments in the banking and financial sector to work on it over the years.