Key features of the toolbox

This toolbox presents policy tools available to central banks and financial supervisors, distinguishing between conventional measures and those that are sustainability-enhanced. The toolbox is categorised into monetary policy, prudential policy regulations and supervision, and other policies.

Priority areas for integrating sustainability factors

The report identifies priority areas for integrating sustainability factors into central banks and financial supervisors’ tools and measures to achieve climate and sustainability objectives. These are:

• Collateral frameworks: discloses exposure of securities and lending practices to climate and other sustainability risks.
• Asset purchase programs, crisis facilities, and refinancing operations: condition access to certain benefits on identified sustainability targets.
• Prudential measures: incentivises sustainability risks assessment and disclosure in its supervision of banks, insurers, investment management companies, and multilateral development banks.
• Management of central bank portfolios: aligns investment portfolios with Paris Agreement targets and creates an active dialogue towards common environmental, social, and governance (ESG) goals.

How sustainable is the crisis response in practice?

The report stresses the importance of central banks and supervisors ensuring crisis responses are sustainable, even in times of crisis. Parallel tracking enhances sustainability but provides limited alignment with crisis measures. The COVID-19 pandemic highlights a need for sustainable investment and risks disclosure through crisis management practices.

The next phase of crisis response

Now, with the pandemic providing an opportunity to build a greener economy, policymakers must identify critical action areas such as shared databases of best practices in sustainable finance. The crisis response succeeds when the recovery not only addresses immediate crisis issues, but also prioritises climate and sustainability goals.

The toolbox: Policy tools available to central banks and financial supervisors

The report presents policy tools available to central banks and financial supervisors to achieve climate and sustainability objectives, which distinguishes them based on their conventional or sustainability-enhanced nature. The tools include several areas:

• Micro and macro-prudential policies,
• Environmental risk analysis and disclosure,
• Central bank mandates, covering green finance operations and asset purchases.

Policy tools used by central banks and financial supervisors in 188 countries during the COVID-19 pandemic

The report uses empirical review of the COVID-19 response by central banks and supervisors in 188 economies, identifying which tools have been applied and with what sustainability dimensions. It highlights that some central banks have taken steps to promote ESG finance, especially in relation to their collateral and asset purchase operations.

Conclusion

The report recommends that central banks and supervisors must enhance their risk assessment and disclosure of ESG factors in their policies and tools. Additionally, they must encourage financial institutions to adopt ESG frameworks through mandatory reporting. Policy tools must incorporate sustainability factors and achieve the dual macro-financial and environmental stability objectives. The report concludes that central banks and financial supervisors can pragmatically respond to climate and sustainability risks while ensuring financial system stability and bridge the gap between objectives and policies.