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This briefing is designed to provide central banks and financial supervisors with an initial toolbox of options to align their COVID-19 crisis response measures with climate and sustainability objectives and mitigate potential sustainability risks. It has been produced by the International Network of Sustainable Financial Policy Insights, Research and Exchange (INSPIRE), a research stakeholder of the Network for Greening the Financial System (NGFS). The paper is written as a ‘rapid response’ and therefore provides only a snapshot of policy tools, but it can serve as a guide to further work to support central banks and supervisors as they seek to apply these measures.

The toolbox part of the paper presents the policy tools available to central banks and financial supervisors, distinguishing between conventional (often sustainability-blind) measures and those that are sustainability-enhanced, in other words they take climate and wider sustainable development factors into account. The table identifies nine different types of tools, grouped in three broad areas: monetary policy, financial stability, and ‘other’.

A second table provides an overview of the responses to the COVID-19 crisis taken to date by monetary and financial authorities in jurisdictions with NGFS member institutions.

Main messages

  • Central banks and financial supervisors are playing a crucial role in shaping the responses to the crisis brought about by the COVID-19 pandemic in both the immediate stabilisation phase and the subsequent recovery phase. Many of the same central banks are also taking action to incorporate climate risks and green finance across their operations.
  • So far, however, there is limited evidence that central banks’ and supervisory authorities’ responses to COVID-19 have actively taken account of climate change or wider sustainability goals.
  • To avoid lock-in to a high-carbon recovery and to fulfil their mandates for financial stability, central banks and supervisors need to align their COVID-19 response measures with the Paris Agreement on climate change. This toolbox provides a framework for doing this.
  • A strong rationale exists for this:
    • To ensure that climate risks are accurately reflected in central banks’ balance sheets and operations
    • To minimise climate-related risks for regulated financial institutions
    • To minimise climate-related risks at the level of the financial system
    • To support governments’ efforts to scale up sustainable finance in line with the Paris Agreement and the Sustainable Development Goals.
  • Numerous instruments that are already being applied by central banks and financial supervisors in the crisis can be calibrated in ways that account for climate- and other sustainability-related financial risks and/or contribute to the achievement of climate and sustainability goals. This initial toolbox sets out three broad categories of measures – monetary, prudential and other – covering nine types of tools. It provides central banks and financial supervisors with options to align their crisis response measures.
  • The briefing also reviews the responses to the COVID-19 crisis taken to date by monetary and financial authorities in jurisdictions that are members of the Network for Greening the Financial System, a central bank alliance.
  • Looking ahead, monetary and financial authorities can take steps now that would contribute to sustainable crisis responses and prevent a further build-up of climate risks in financial institutions’ balance sheets, namely:
    • Amend collateral frameworks to better account for climate change-related and other environmental risks
    • Align asset purchases and refinancing operations with Paris Agreement goals
    • Adjust prudential measures to avoid a manifestation of transition risks on the balance sheets of financial institutions

Adopt sustainable and responsible investment principles for portfolio management, including policy portfolios.

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