The climate crisis is no longer solely an environmental issue – it is increasingly a matter of financial stability. As the global energy transition accelerates, de-risking this shift has become an urgent responsibility for central banks, particularly those in wealthier nations. These institutions have unique economic leverage and capabilities to support the financial response to the climate crisis, but despite growing awareness of the risks, their full potential has not yet been realized.
The Role of Central Banks in Combating Climate Change
Central banks from the global north, as issuers of reserve currencies, hold significant power in mitigating climate-related financial risks. International organizations such as the Network for Greening the Financial System (NGFS) have issued reports outlining the importance of integrating climate risks into monetary policy. However, central banks have been slow to fully leverage their economic tools in combating the climate crisis.
To meet the demands of the climate emergency, central banks must take an active role beyond just acknowledging transition risks. They need to support the shift to renewables—particularly in the global south, where financial gaps hinder progress—while simultaneously curbing financial support for fossil fuel expansion. Central banks, having demonstrated their ability to act swiftly during crises like the 2008 financial meltdown and the COVID-19 pandemic, must adopt a similar proactive approach to climate change, which although less immediate, threatens devastating long-term economic fallout.
Three Key Strategies for De-Risking the Energy Transition
Several methods can help central banks de-risk the global energy transition. Three specific strategies stand out:
Climate-TLTROs for Long-Term Investment
Targeted long-term refinancing operations (TLTROs) could be adapted into a “green” version, called climate-TLTROs, to provide low-interest or even zero-interest loans to development finance institutions (DFIs) from both the global north and south. These loans would be earmarked for climate-focused investments. DFIs, which are public development institutions, could offer long-term loans and grants to support renewable energy projects, given their ability to focus on long-term sustainability rather than short-term profits.
By offering ultra-long-term financing (up to 100 years or more), central banks would treat these loans as permanent assets on their balance sheets. This approach would signal a deep commitment to sustainability and ensure the long-term nature of climate investments, although careful management would be required to maintain the balance sheet’s overall health.
De-Risking Renewable Energy Investments in the Global South
One of the primary obstacles to renewable energy projects in the global south is the lack of reliable risk assessments, which makes private investors hesitant. Central banks could help by providing guarantees for renewable energy investments, reducing perceived risks and unlocking much-needed private capital. These guarantees, in partnership with DFIs, would make renewable projects more attractive to institutional investors, leading to lower interest rates and making renewable energy more affordable. This aligns with the UN’s goal of clean and affordable energy for all.
Convertible Climate Bonds for Fossil-to-Renewable Energy Transition
Many large companies are sitting on fossil fuel assets that are at risk of becoming stranded due to the transition to renewable energy. Central banks could help facilitate this transition by offering to purchase convertible climate bonds (CCBs) from DFIs as an exit strategy for fossil fuel companies. These bonds would finance the purchase of fossil fuel assets by DFIs, which would then repurpose these assets for renewable energy development. The proceeds from these purchases would be used to fund new renewable energy capacity.
This strategy ensures that fossil fuel assets are effectively removed from the energy system and replaced with clean energy infrastructure, supporting a smoother transition and reinforcing global sustainability goals.
A Long-Term Vision for Climate Action
The strategies outlined here illustrate that central banks can play a pivotal role in de-risking the transition to a sustainable, low-carbon economy. By thinking long-term—particularly through mechanisms like climate-TLTROs—central banks would recognize that addressing climate change is a multigenerational challenge that requires bold, innovative actions today to secure a livable future for future generations.
While these ideas are still in principle and require further clarification of monetary policy and legal frameworks, the political will exists to implement them. Central banks must seize the opportunity to lead the charge in the global energy transition and help ensure a stable, sustainable financial future for all.
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