Warning words in a warming world: central bank communication and climate change

Central banks are now among the most active players in the public debate on climate change and the low-carbon transition. By focusing on central banks’ public communication strategies, this paper addresses how these technocratic institutions have become leaders in shaping the public conversation around climate change issues and the implications of their prominence in the debate.

The authors study climate-related central bank communications using a dataset of more than 35,000 speeches delivered by 131 central banks from 1986 to 2023. They employ natural language processing techniques to identify and trace the evolution of two climate-related narratives, centred respectively on green finance and climate-related risks. They find that central banks’ public communication strategies are primarily driven by underlying institutional factors, rather than exposure to climate-related risks.

The authors also study the impact of climate-related communication on financial market dynamics through both a portfolio and a firm-level analysis. They find that equity returns of ‘green’ firms outperform those of ‘dirty’ firms when central banks engage more frequently and intensely with climate-related topics.

Overall, the paper shows the critical role of central bank communications in signalling and shaping market expectations and valuations in the context of the low-carbon transition.

Key points for decision-makers

• The authors built a novel dataset containing 35,487 speeches delivered by 131 central banks over the period 1986–2023, making it significantly larger than any existing dataset. The dataset is freely available and can be used to investigate additional research questions linked to central bank communication.
• The data show how climate-related communication originated primarily from central banks in Southeast Asia and the Pacific, before being surpassed by Western Europe central banks after 2015.
• The number of climate-related speeches increased steeply in recent years, before stabilising at around 550 speeches a year since 2021, representing almost one-third of all central bank speeches.
• Central banks in developing and emerging economies and/or supervising international financial hubs tend to use a more ‘promotional’ perspective and push green finance opportunities as a driver of economic development, reflecting their stronger involvement in markets and adherence to political strategies.
• Central banks in high-income economies tend instead to prefer a ‘prudential’ approach focused on the concept of climate-related financial risks, which aligns with their independence and narrower mandates. However, more recently some high-income-country central banks have shifted partially towards the green finance topic.
• The returns of ‘green-minus-dirty’ portfolios of US firms, i.e. portfolios long in the equities of more environment-friendly firms and short in more polluting firms, are shown to be positively affected when central bank communication has a stronger focus on climate-related topics.
• These results are confirmed when looking at firm-level returns for 41 countries: the stock returns of greener firms are shown to benefit from a higher frequency and salience of climate-related focus in central bank speeches, especially when climate-related financial risks are the dominant topic.

Access the authors’ dataset for free at https://cbspeeches.com/ or use their interactive app.

Read a comment piece by Emanuele Campiglio published by Central Banking on 21 January: Central banks’ words matter for climate