Are Central Banks the Hidden Climate Actor?

As world leaders flew into Brazil for the global climate summit (known as COP30), a global network of central banks and supervisors—the Network for Greening the Financial System or NGFS—spotlighted the cost of climate inaction. The risk of macroeconomic and financial instability is measurable and mounting, they emphasized, not only in the long run but in the short term, within a three to five year horizon. On the same day, November 5, the COP29 and COP30 presidencies released their Baku to Belém Roadmap, calling for central banks to integrate climate risk into their monetary and supervisory frameworks.

The reminder could not be timelier. In 2024, the world’s largest banks increased their financing to fossil-fuel companies to the tune of some $162 billion, for a total of about $869 billion, according to the latest annual report from the Banking on Climate Chaos Coalition.

Environmental concerns aside, climate change is a financial crisis unfolding at first in slow motion, and now increasingly quickly. Central banks claim to safeguard global financial stability and manage systemic risk; climate change as a systemic risk is fully within their remit. They already have the authority and the tools to respond. What is needed is the decision to use them.

A business-as-usual scenario entails global gross domestic product (GDP) losses of up to 30 percent by 2100, with tail risks reaching 50 percent, according to the NGFS. But climate change is not only about long-term risks, daunting as they are. The short term risks are real and mounting. Within the next three to five years, the NGFS declaration pointed out, regional climate disasters could trigger GDP losses of up to 6 percent in Asia and 12.5 percent in Africa, potentially fueling broader macro-financial instability by disrupting food systems and supply chains. Wildfires and floods significantly heighten financial risk for at least two years after events occur, according to a 2025 study in Energy Economics spanning 115 countries from 1984 to 2021. Climate disasters destroy infrastructure, drive nonperforming loans, trigger liability risks, push up insurance costs, and destabilize food and energy markets. 

Compounding these effects is what European Central Bank board member Isabel Schnabel calls “fossilflation.” As long as economies stay dependent on fossil fuels, every disruption in oil, gas, or coal supply feeds through to higher prices across the economy.

Climate risk management falls squarely within central bank mandates, former Fed governor Sarah Bloom Raskin argued as early as 2020. Yet most central banks still limit themselves to stress testing and disclosure, steps that cannot change the structural profitability gap driving capital into fossil fuels.

Green policies were effective at reducing central banks’ vulnerability to climate-related shocks, the Energy Economics study shows. Central banks with green lending programs, mandatory climate disclosures, or environmental risk guidelines experienced smaller increases in credit risk and fewer financial stability disruptions after climate disasters. 

Central banks can require banks and other supervised financial institutions to disclose their climate exposures and factor environmental risks into how they assess capital adequacy. These measures can work alongside green finance tools such as preferential lending for renewable energy projects.  

None of this requires new legal authority. It requires applying existing authority differently. Central banks already set collateral frameworks that decide which assets qualify for favorable treatment. They supervise banks, shaping lending behavior. They purchase assets that influence market signals, and coordinate through global networks such as the Bank for International Settlements, the International Monetary Fund, the G20 Finance Track, and the NGFS.

Applying this authority differently could mean, for example, adjusting collateral frameworks so that high-carbon assets carry higher haircuts—discounting their value—while verified low-carbon investments receive preferential terms. These are technical decisions central banks make every day; these decisions also have enormous power to redirect capital away from fossil fuels and toward more resilient economies.

The sharpest differences in central bank climate policy fall along geopolitical lines. In China, Brazil, and Indonesia, monetary authorities are using financial tools to strengthen national resilience and industrial capacity. China’s People’s Bank introduced its Carbon Emission Reduction Facility in 2021, offering preferential lending for renewable projects as part of national industrial policy. Brazil’s central bank has advanced green finance taxonomies and mandatory climate disclosures. Indonesia’s central bank has used risk-weighting adjustments to discourage lending to carbon-intensive sectors.

Western banks face an institutional bind. Their legitimacy depends on independence from political pressure. The doctrine was simple: Politicians might pursue short-term stimulus before elections, but independent central banks could keep inflation stable. 

That logic worked for interest rate policy. It fails for climate. Steering capital away from fossil fuels involves decisions about which industries prosper, which regions decline, and which assets become stranded. Independence frameworks were designed to avoid precisely these choices.

By narrowly defining risk, central banks in the United States and much of Europe have trapped themselves in a paradox. They acknowledge climate change as a systemic threat but refuse to act on the mechanisms that sustain it. In the United States, this caution has hardened under the current administration, which has disavowed climate commitments and discouraged federal agencies from considering environmental risk in financial oversight. The Federal Reserve formally withdrew from the NGFS, scaled back references to climate in official statements, and scaled back dedicated climate-risk rules and guidance. Fossil fuels still promise higher short-term returns than renewables, so money continues to flow toward instability. The longer central banks defend this contradiction, the more their claim to safeguard financial stability rings hollow.

The independence dilemma reflects real institutional limits. Central banks in democracies built their credibility by focusing narrowly on inflation and financial stability, not by directing industrial policy. If they openly steer credit, they risk politicization. A central bank that today favors clean energy could tomorrow be pressed to favor politically connected sectors. Insulation from such demands underpins their ability to control inflation.

Some argue that central banks should drop the pretense of neutrality and use their power to steer capital toward climate goals. That argument reflects a growing divide over how far central banks should go in using monetary tools for climate objectives. Expanding their mandates in this way could accelerate the transition but would also test the very principle of independence that modern monetary systems were built on.

But central bank independence was never designed for systemic risks unfolding over decades. The framework assumed monetary authorities could preserve stability with interest rate adjustments and emergency lending. 

Climate change breaks that assumption. When instability comes suddenly, central banks intervene without hesitation. From the 2008 financial crisis to the Eurozone debt turmoil, Brexit volatility, and pandemic liquidity injections, they have repeatedly expanded their remit when financial systems were at risk. They claimed emergency necessity each time. 

Central banks move quickly when instability arrives suddenly but hesitate when it builds over time. The issue is both timing and definition. They are structured to manage short, acute shocks such as liquidity freezes or market panics, where intervention can quickly restore order. Climate impacts appear as recurring disruptions that, taken together, erode stability. By viewing these as too gradual to require response, central banks underestimate how fast systemic risk can accumulate. The NGFS’s November 5 declaration challenges that assumption, warning that climate-related losses could materialize within three to five years. Climate change shows how slow-moving risks can become immediate threats, and why the old crisis-response model no longer fits.

Central banks are not insulated from politics. They operate in transnational networks where norms spread quickly. The European Central Bank, under Christine Lagarde, moved further on climate after studying China’s Carbon Emission Reduction Facility. The U.K. government’s 2023 order to scale back the Bank of England’s climate role shows political pressure working in the opposite direction.

Climate-vulnerable countries in the V20 can push for stronger climate-risk modeling within the NGFS. Expanding these models to reflect developing countries’ specific risks would strengthen the evidence base for central bank action. 

Elected officials also play a central role. Legislators in major economies influence mandates, appointments, and oversight, making central bank climate policy a site of democratic contestation. When Bloom Raskin’s 2022 nomination to a senior Fed role was blocked, it underscored how fiercely fossil fuel interests defend their access to capital.

Coalition opportunities exist. Parts of organized labor support climate action when linked to just transition protections. Segments of finance, especially insurers and asset managers, recognize climate threats to returns and want clearer frameworks. Civil society groups such as Positive Money and Finance Watch have developed detailed proposals for central bank tools. These alliances can build pressure from outside and within the system.

Central banks can begin by reframing climate as a financial stability imperative, not an environmental cause. Their own NGFS scenarios quantify the threat—30 percent potential GDP loss by the end of the century. Acknowledging this publicly would recast climate action as prudent risk management and expose opponents as defending a status quo built on denial.

They can correct how risk is priced, working through the Bank for International Settlements. Fossil fuel assets still qualify as “safe” collateral in central bank operations, a fiction that has hardwired fossil finance into the global monetary system. Revising collateral frameworks to discount high-carbon assets more heavily, while giving low-carbon investments preferential terms, would redirect capital more effectively than any disclosure requirement.

These actions will not resolve the deeper tension between independence and urgency. But they would underscore central banks’ role as guardians of stability in a destabilized world. If legislatures refuse to expand mandates or take responsibility through fiscal policy, the cost of inaction will eventually force central banks into crisis management mode. 

Reframing climate action as a matter of financial prudence rather than environmental policy shifts the burden back to elected officials. It allows central banks to act within their existing mandates while highlighting the political failure to address systemic risk. This can help clear space for technocrats to act before the next crisis. The tools exist. The coordination networks exist. What remains missing is not capacity, but the political will to act before the next emergency decides for them.