The climate crisis is no longer just an environmental issue – it also affects financial stability. As a result, de-risking the global energy transition has become a responsibility for central banks in the global north.
Organizations such as the Network for Greening the Financial System have published multiple reports highlighting climate-related risks. As issuers of global reserve currencies, central banks in wealthier countries have unique economic capabilities to support the financial response to the climate crisis. However, despite growing awareness of the risks, they have not fully leveraged their power to combat climate change.
To keep pace with the accelerating climate emergency, central banks must go beyond merely recognizing transition risks. They must understand the risks posed by continued financial support for fossil extraction and actively contribute to de-risking the transition. This involves facilitating the shift to renewables—especially in the global south, where a significant financial gap hinders progress—and restricting financial backing for fossil fuel expansion.
Central banks have demonstrated their capacity to act swiftly in times of crisis. During the 2008 financial meltdown and the COVID-19 pandemic, they rolled out innovative measures to stabilize economies. The climate crisis demands a similarly urgent response. While its effects may seem less immediate, the long-term economic fallout of inaction will be devastating.
There are numerous ways central banks can de-risk the energy transition. Three key measures should be prioritized:
1. Climate-TLTROs for Long-term Investment
Several proposals have suggested creating a “green” version of the existing targeted long-term refinancing operations (TLTROs). Climate-TLTROs would differ primarily in their maturity, providing ultra-long-term, low-interest (or sometimes zero-interest) loans to development finance institutions (DFIs) from both the global north and south. These funds would be earmarked for climate investments.
DFIs, as public institutions, can execute this task more effectively than commercial banks, as they are not driven by profit maximization and can offer loans over much longer periods. By offering financing for up to 100 years or more, central banks would effectively treat these loans as permanent assets on their balance sheets. This approach reflects the multigenerational nature of the climate challenge and signals a long-term commitment to sustainability. Care must be taken to ensure that the size of these loans does not interfere with normal monetary policy operations.
2. De-risking Renewable Energy Investments in the Global South
A major barrier to renewable energy projects, especially in the global south, is the lack of reliable risk assessments. Central banks can help by backing guarantees for renewable energy investments, reducing the perceived risk and unlocking private capital.
These guarantees, provided in partnership with DFIs, would transform renewable projects into low-risk investments. This would attract institutional investors, lowering interest rates and making renewable energy more affordable worldwide. It would also align with the UN’s Sustainable Development Goal of providing clean and affordable energy for all.
3. Convertible Climate Bonds for a Fossil-to-Renewable Energy Transition
Many large companies are sitting on fossil fuel assets that may soon become stranded. Central banks could offer to buy convertible climate bonds (CCBs) from DFIs as an exit strategy for fossil fuel companies.
Under this plan, DFIs would purchase potentially stranded fossil fuel assets from companies that provide an investment plan to build new renewable energy capacity with the received funds. These assets would then be bundled into new CCBs and sold to the central bank. This process would facilitate a smoother transition by ensuring that fossil assets are removed from the energy system and replaced by new, additional renewable energy investments.
Taking the Long View Over Generations
The proposed solutions illustrate that central banks can play a transformative role in de-risking the transition to a sustainable economy. In particular, climate-TLTROs highlight the importance of thinking long-term. By structuring these loans as multi-generational assets that remain on balance sheets for decades, central banks would acknowledge that the fight against climate change spans many lifetimes and requires bold, innovative action today to secure a livable future for tomorrow.
While the tools outlined above are feasible in principle, numerous monetary policy and legal issues remain to be clarified. However, once there is political will, these solutions could be implemented to pave the way for a successful and sustainable energy transition.
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