Central banks play a critical role in promoting financial system stability, influencing credit creation, and setting monetary policy. Over the past three decades, their role has expanded to include the integration of sustainability considerations—particularly climate change and environmental risk—into financial oversight and macroeconomic planning. The United Nations Environment Programme Finance Initiative (UNEP FI) has been instrumental in shaping this new role by advocating for the incorporation of environmental, social, and governance (ESG) factors into financial regulation and supervision. As stewards of monetary systems and regulators of financial institutions, central banks are uniquely positioned to catalyze a shift toward a sustainable global financial system.
Central Banks and the Evolution of Sustainable Finance:
Traditionally, central banks focused narrowly on maintaining price stability, monetary control, and financial soundness. However, increasing evidence of climate-related and environmental risks affecting macroeconomic and financial stability has broadened their mandate. UNEP FI, through various partnerships and thought leadership initiatives, has encouraged central banks to recognize that sustainability and climate risks are no longer “non-financial” issues. They are financial by nature and must be addressed proactively.
UNEP FI’s collaborations with institutions like the Network for Greening the Financial System (NGFS), Task Force on Climate-related Financial Disclosures (TCFD), and the emerging Taskforce on Nature-related Financial Disclosures (TNFD) have helped central banks rethink how sustainability intersects with financial regulation and risk oversight.
The Network for Greening the Financial System (NGFS)
Formed in 2017, the NGFS is a key UNEP FI-aligned initiative composed of over 140 central banks and financial supervisors. It supports UNEP FI’s mission by developing best practices and tools for integrating climate and environmental risks into supervisory and monetary policy frameworks. UNEP FI regularly engages with NGFS to align sustainable finance practices across jurisdictions.
Key contributions of NGFS:
- Climate scenario analysis models for central banks.
- Guidance on integrating climate risk into microprudential supervision.
- Recommendations for disclosures and green taxonomy development.
Through NGFS, central banks operationalize UNEP FI’s vision at the policy level.
Climate Risk and Financial Stability:
UNEP FI has strongly advocated the recognition of climate change as a systemic risk to the financial system. Central banks, in response, are increasingly factoring physical risks (like extreme weather events) and transition risks (related to carbon pricing or regulation) into their stress testing and financial surveillance tools.
Examples:
- The Bank of England developed the Climate Biennial Exploratory Scenario (CBES) to assess how climate risks affect financial firms.
- The European Central Bank (ECB) integrated climate risk into its 2022 banking supervision and capital adequacy reviews.
- The People’s Bank of China (PBoC) created a green finance evaluation system for banks.
These efforts reflect the central banks’ alignment with UNEP FI’s recommendation to mainstream climate risk into core regulatory and macroeconomic frameworks.
Supporting the Transition to a Green Economy:
Central banks also support the reallocation of capital toward green and sustainable activities, in line with UNEP FI’s Principles for Positive Impact Finance. Though most central banks maintain market neutrality in asset purchases, many are exploring or already implementing “green tilting” in their operations.
Examples:
- The ECB has begun considering the carbon intensity of corporate bond purchases.
- The Bank of Japan launched a green lending facility to incentivize climate-aligned loans.
- The Reserve Bank of India (RBI) is supporting green infrastructure financing and working on integrating ESG into banking guidelines.
Through such initiatives, central banks are enabling a financial system that rewards sustainable economic activity.
Role in Taxonomy and Disclosure Development:
UNEP FI emphasizes the importance of taxonomy systems to define what constitutes a “green” or “sustainable” activity. Central banks, in collaboration with regulators and finance ministries, contribute to the development of national and regional green taxonomies.
- The People’s Bank of China has developed a Green Bond Endorsed Project Catalogue, aligned in part with EU standards.
- The Bank of Thailand is participating in ASEAN-level green taxonomy development.
- The Central Bank of Nigeria issued a climate risk framework aligned with TCFD and is supporting local green taxonomy efforts.
Central banks also help standardize ESG disclosures, working with financial institutions to promote consistent and transparent reporting practices.
Integration with UNEP FI-led Net-Zero Alliances:
While central banks are not direct members of the Net-Zero Banking Alliance (NZBA) or Net-Zero Asset Owner Alliance (NZAOA) led by UNEP FI, they facilitate these initiatives by:
- Supervising financial institutions that are signatories.
- Ensuring policy environments support long-term decarbonization.
- Encouraging transition planning and stress testing aligned with net-zero commitments.
In particular, central banks often work with ministries of finance to enable green fiscal tools, carbon pricing mechanisms, and disclosure mandates, which support private-sector participation in net-zero finance.
Macroprudential Policy and Sustainable Finance:
UNEP FI encourages central banks to incorporate ESG risks into macroprudential regulation to protect overall financial stability. Tools include:
- Green capital buffers: Requiring banks to hold more capital against high-emission assets.
- Countercyclical buffers: Adjusted for climate risk exposure.
- Systemic risk oversight: Monitoring green asset bubbles or carbon transition shocks.
Some pilot programs:
- Banque de France incorporating ESG risks into systemic risk analysis.
- Central Bank of Brazil issuing guidelines for climate and social risk supervision.
These efforts align with UNEP FI’s view that climate change poses long-term macro-financial risks.
Promoting Just and Inclusive Transitions:
In line with UNEP FI’s goal of a just transition, central banks are increasingly concerned about the social implications of climate policy, including job losses in high-emission industries and energy affordability.
For instance:
- The South African Reserve Bank has engaged with financial institutions to manage the social risks of energy transition.
- The Bank of England considers regional and labor market effects when evaluating climate policy.
UNEP FI provides research and guidance to support inclusive green finance and the alignment of monetary and financial systems with equitable development.
Capacity Building and Technical Collaboration:
UNEP FI works closely with central banks, especially in developing economies, to build technical capacity for climate risk assessment, stress testing, and ESG integration. It provides:
- Training modules on climate finance.
- Technical assistance on TCFD and TNFD adoption.
- Platforms for peer learning through NGFS and regional workshops.
For example:
- UNEP FI has supported central banks in Latin America, Africa, and Asia in creating sustainable finance roadmaps and green banking frameworks.
- Collaborations with the IMF and World Bank also help align central bank reforms with UNEP-led sustainable development goals.