## wpiea2024192-print-pdf ## Source details **Canonical URL:** [wpiea2024192-print-pdf](https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024192-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2024/english/wpiea2024192-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2024/english/wpiea2024192-print-pdf.pdf.json) --- ### I. Introduction — central messages - The Paris Agreement and the COP28 Agreement are described as "landmark international binding treaties" with the common goal to combat climate change and adapt to its effects; the Agreement aims to hold the increase in the global average temperature to below 2oC, preferably to limit the temperature increase to 1.5oC above pre-industrial levels. - Implementation of the Agreement requires economic and social transformation; countries undertake nationally determined contributions and communicate efforts to build resilience to greenhouse-gas emissions. - Climate change is a critical macroeconomic and financial policy challenge for the financial sector and the IMF’s membership; for the first time both the G7 and G20 presidencies have included climate action among their policy priorities. - The Network for Greening the Financial System (NGFS) shares voluntary best practices on environmental and climate risk management; as of May 29th, 2024, the NGFS has 141 members and 21 observers. - The IMF contributes in its core areas (including Article IV consultations, lending facilities, and institutional cooperation); the Resilience and Sustainability Trust (RST) is cited as one main contribution to provide policy support and affordable longer-term financing. - Physical risks (increasing severity and frequency of extreme weather events and longer-term shifts) and transition risks (adjustment toward a low-carbon economy affecting asset values) could produce severe disruptions to price and financial stability and potentially initiate systemic financial crises. - The paper assumes primary responsibility for national climate policy rests with governments; it examines whether and how central banks can integrate and support climate-related policies within their current legal frameworks and mandates. - Central banks increasingly recognize physical and transition risks as bearing on their mandates of price and financial stability and have adopted actions to integrate climate change into activities, but the contours of permissible roles depend on each central bank's specific legal regime, capacity of other institutions, and institutional interactions with government. - The paper does not systematically distinguish among mitigation, adaptation, and transition policies unless specifically mentioned; it notes these commonly used policy categories are sometimes unhelpful in assessing legality of central bank actions. ### Key legal and institutional principles - Central banks are public institutions and can legally act only within their legal mandate; autonomy and accountability require clear legal objectives, functions, and powers. - A clear statutory mandate that indicates hierarchy when multiple objectives are assigned and establishes the primacy of price and financial stability is essential for legitimacy and legal certainty. - Legal certainty reduces reputational, legal, and political risks; a vague or missing mandate could affect central bank autonomy and credibility and expose monetary policy to fiscal dominance. - The paper's objective: advance legal understanding of the intersection between central banking law and climate change under current legal mandates; take stock, compare approaches, and identify legal considerations impacting decisions and policies without prescribing permissible activities or opining on specific overreach. - Analysis focuses on legal formulations of objectives regarding price and financial stability, support of government economic policy, and economic development; reflects diverging jurisdictional approaches. ### Institutional arrangements and safeguards - Well-designed institutional arrangements grounded in sound legal basis support legitimacy of autonomous central bank decision-making and can prevent encroachment into the remit of fiscal authorities. - Critical considerations include decision-making arrangements, operational autonomy, transparency, and accountability—relevant also to banking supervisory agencies. ### Scope limitations - The paper excludes broader environmental issues not directly climate-related (e.g., air pollution, water pollution, land contamination, reduced biodiversity, deforestation). - The analysis is comparative and selective; law can change and the discussion is not exhaustive. - Whether international environmental obligations directly constrain central banks is a question of national constitutional law and domestic transposition. - Climate-related litigation is increasing; one central bank has been sued to press for greater inclusion of climate concerns in policymaking (ClientEarth case, Box 1). ### II. The legal framework of central banks and climate change — core findings - Central banks operate within a multi-layered legal framework: constitution (in some jurisdictions), organic central bank law, other relevant laws, and secondary legal instruments (e.g., by-laws). - Organic central bank law typically establishes objectives, functions, powers, decision-making bodies, and autonomy; secondary instruments detail governance and operations. - Some commentators argue for limiting central bank mandates to price and financial stability to preserve focus and autonomy. - National constitutional law determines: - (i) whether and how international agreements supersede national law, - (ii) whether environmental protection provisions in constitutions supersede conflicting domestic laws, and - (iii) whether international agreements impose obligations on central banks. - Central banks and their officials could be exposed to human rights and climate-related litigation as such cases have proliferated since adoption of the Agreement. ### Box 1 — ClientEarth v NBB (case summary and implications) - ClientEarth sued Banque Nationale de Belgique (NBB) alleging illegal implementation of the ECB/ESCB Corporate Sector Purchase Programme (CSPP) for failing to assess climate, environmental, and human rights impacts of bond purchases. - ClientEarth's legal claims included invalidity of the ECB’s CSPP decision and illegality of NBB’s implementation; argued ECB/ESCB must mitigate systemic risks (including climate) and act consistently with EU climate objectives. - Procedural history: Brussels Tribunal of First Instance rejected the preliminary reference application in December 2021 on procedural grounds; ClientEarth appealed but later withdrew after Eurosystem reforms that tilted purchases toward better climate performers. - Implication: illustrates tensions between asset purchases and obligations to consider environmental, climate, and human rights impacts; exemplifies claims that central banks may be required to consider climate-related systemic risk in monetary policy operations. ### Central bank role in climate-related macroprudential policy - Macroprudential responsibilities are typically assigned to the monetary authority or among agencies; central banks often play a key role given core stability objectives. - Institutional examples: - USA: Federal Reserve Board established a Financial Stability Climate Committee (FSCC). - Reserve Bank of New Zealand: Climate Change Strategy (2018) includes in-depth financial stability analysis. - Mexico: Financial Stability Council approved regulatory framework for Sustainable Finance Committee and assessed banking system exposures to climate/environmental risks. - Reserve Bank of Australia: monitors climate risks as part of financial stability mandate. - Central banks, supervisors, and regulators have integrated climate considerations into monitoring and prudential supervision, developing stress-testing and scenario analysis, bridging data gaps, and raising awareness. - Legal interpretation: integration of climate considerations is pursued in the service of the financial stability mandate and does not create an independent mandate to promote climate policy; actions should remain aligned with legal frameworks to avoid legal, political, and reputational risks. - Recommendation: central bank climate actions should be clearly within legal remit and hierarchy of objectives. ### Support of government economic policy and development mandates - Many central bank laws list support to the government’s economic policy or economic development as an objective; legal formulations differ across jurisdictions. - Examples: - Article 127(1) TFEU: ECB/ESCB shall support general economic policies in the Union, contributing to objectives in Article 3 TEU, which includes “a high level of protection and improvement of the quality of the environment”. - Bank of England: Section 12 (1) of the Bank of England Act allows the Chancellor to specify economic policy considerations for the MPC; on November 22, 2023, the Chancellor updated MPC’s remit to confirm government economic policy objective of “strong, sustainable and balanced growth” and the MPC has been explicitly mandated to incorporate environmental considerations into monetary policy decisions. - Legal uncertainty: a subsidiary objective to support “the government’s economic policy” may not provide a clear legal basis for climate policies unless the government’s policy explicitly includes environmental objectives. - IMF staff view: legislatures should insert explicit references to (sustainable) environmental policy in central bank subsidiary objectives or the government should clarify that its economic policy includes environmental objectives. - Hierarchy: examples underscore primacy of price stability and IMF staff recommend well-defined hierarchies in central bank laws. - Prevalence of developmental mandates: 73% of central bank laws (in the analyzed sample of 169 legal frameworks) contain broader mandates allowing promotional activities; adjacent categories labeled in the figure include “Development Function”, “Development/Economic Function Supported”, “No Development or Economic Policy Objective”, “Uncertain” with 26% and 1% appearing as adjacent percentages in the source graphic. - Promotional objectives are broad and can cover social, economic, and environmental issues; but climate concerns generally were not envisaged when many of these objectives were drafted. - Legal certainty favors explicit wording enabling central bank support for government climate policy; central bank role remains ancillary and must fit within hierarchy of objectives and powers. ### Examples of central bank development programs supporting climate change policies (Box 3) - Bangladesh Bank (BB): - Product list expanded from 55 green products/projects/initiatives (2017) to 68 (2020) and 70 in 2023. - Quota: 5 percent of all loan disbursement and investments for green financing and 20 percent for Sustainable financing. - Refinance schemes and funds: Technology Development Fund (TDF) (BDT 10 billion), Green Transformation Fund (GTF) (BDT 50 billion, USD 200 million, Euro 200 million), Refinance Scheme for Green Products/Projects/Initiatives (BDT 4 billion), ADB supported Financing Brick Kiln Efficiency Improvement Project (USD 50 million). - Issued Policy on Green Bond Financing for banks and non-bank FIs (2022); introduced Sustainability Rating for Banks and non-bank FIs (2020); updated ESRM guideline with 10 sector-specific ESDD check lists (2022); working on Green Credit Guarantee Scheme under BEST Project. - Monetary Authority of Singapore (MAS): - Sustainable Bond Grant Scheme to defray external review costs; more than S$8 billion in green, social and sustainability bonds issued in Singapore since 2017. - Intention announced to launch a grant to support sustainability-linked loans. - Bank Negara Malaysia (BNM): - Adviser role in Governmental Green Technology Financing Scheme (GTFS) with initial allocation RM1.5 billion, later increased with additional RM2.0 billion. - Government guarantees 60 percent of financing via Credit Guarantee Corporation Malaysia Berhad (CGC) and bears 2 percent of total interest or profit rate. - Bank of Korea: - Explored utilizing lending, payment and settlement and open market operations to encourage funds for the eco-friendly sector; considering support for “green growth companies” via bank intermediation support facility. - Banco Central do Brasil (BCB): - New sustainability agenda foresees role in allocation of resources toward a more sustainable economy; established a sustainable liquidity facility involving feasibility study and possible implementation for financial institutions with eligible collateral including private equity and credit claims. - Bank of Japan: - Strategy on Climate Change (July 2021): fund-provisioning measure providing funds to financial institutions against investment or loans addressing climate change. - First loans worth JPY 2.05 trillion (USD 18 billion) disbursed on 24 December 2021 and matured on 30 January 2023. ### Principles of proportionality, objectivity, and non-discrimination (Box 4) - These principles guide central bank operations and appear in statutes or general administrative law across jurisdictions. - EU context: Article 127 TFEU requires ECB/ESCB to act in accordance with open market economy with free competition; market neutrality "forms part of the principle of an open market economy with free competition". - Dynamic market neutrality argument: if markets under-price climate risks, central banks might take them into account in asset purchase and collateral policies, subject to objective and scientifically grounded determinations. - Legal formulations from country laws emphasize impartiality, objectivity, fairness, and non-discrimination (examples: Brunei, North Macedonia, Moldova, Sweden, Japan). - Courts use proportionality in reviewing central bank measures (German Constitutional Court and Court of Justice of the EU applied proportionality in OMT and PSPP reviews with differing outcomes). ### Monetary policy, monetary operations, and climate - Core central bank functions often include: (i) formulation and implementation of monetary policy, (ii) granting credit to the government, (iii) providing advice to the government, and (iv) holding and managing official foreign reserves (OFR). - Organic laws typically authorize monetary operations such as outright sales and purchases, repurchase agreements, Lombard loans, swaps and other derivatives. - Climate risks affect variables relevant to monetary policy (output, investment, employment, consumption, growth, productivity, wages, international trade, inflation) and can be relevant to monetary policy formulation and transmission. - Incorporating climate-related effects into monetary policy is consistent with duty to ensure price stability and "does not inherently raise legal concerns nor require changes to central bank laws." - Central banks have incorporated climate considerations into eligible assets, collateral, and risk management frameworks to support price stability objectives. ### Country examples of climate considerations in monetary policy frameworks (Box 5) - China: - April 2021: PBoC measures to green monetary and financial policies: include green bonds and green credit as eligible collateral, limit investments in high-carbon assets, add green bonds to foreign exchange reserves. - 2021: launched Carbon Emission Reduction Facility (CERF) to provide low-cost funds to financial institutions guiding carbon reduction loans at rates close to the Loan Prime Rate. - United Kingdom: - Bank of England Market Notice (November 2021): target a 25 percent reduction in the weighted average carbon intensity of its Corporate Bonds Portfolio Scheme (CBPS) by 2025, and full alignment with net zero by 2050; purchases “tilted” toward stronger climate performers within sectors with climate-related eligibility criteria. - ECB/ESCB: - 2021 monetary policy strategy review: climate is a policy priority; decided to develop macroeconomic modelling and adapt operational framework regarding disclosures, risk assessment, corporate sector asset purchases and collateral framework. - ECB climate action plan from October 2022 includes reinvesting corporate bond holdings to issuers with better climate performance; limit collateral from high carbon footprint entities; define compliance with Corporate Sustainability Reporting Directive as eligibility requirement; and enhance climate risk assessment tools. - Sweden: - Sveriges Riksbank allowed continued purchase of green government, municipal, and corporate bonds for second half of 2022; as of September 1, 2022, would only purchase non-financial corporate bonds from companies reporting emissions per Task Force for Climate-related Financial Disclosures; Asset purchase program finished 31 December 2022. ### Legal and operational implications for green QE and asset eligibility - Climate integration into asset eligibility for collateral and asset purchase programs must fit within legal mandate and support price stability objectives. - Green QE must not impair monetary policy effectiveness; if pool of “green” assets is not sufficiently deep, risks to mandate fulfillment arise. - Where proportionality, non-discrimination, or objectivity apply, green QE must comply with these principles. - Key legal questions include scientific basis for labeling assets “green” and the presence of an objective taxonomy set by politically accountable bodies with scientific basis; absence of such can increase reputational and legal risks. - Preconditions for green QE include (i) central bank autonomy and (ii) credible macro-economic policies. - Transition from QE to Quantitative Tightening will "drastically reduce any opportunity to engage in ‘green’ asset prioritization for monetary policy operations." ### Prohibitions on monetary financing and exceptional temporary financing (paragraphs 34–37) - Many central bank laws prohibit or strictly curtail monetary financing to prevent fiscal dominance: - Article 123 TFEU prohibits ECB and national central banks of the ESCB from granting public entities any type of credit facility or purchasing debt instruments directly from them. - Reserve Bank of Malawi Act: Section 39 limits short-term advances to government to cover temporary shortfalls up to a maximum of 10 percent of the average inflation adjusted annual domestic revenue of the government for the past three financial years; Section 28 restricts purchases of government securities to secondary markets. - Central Bank of Kenya Act: Section 46(1) permits advances for temporary accommodation subject to security, market interest rate, and ceiling of 5 % of gross recurrent revenue for the latest audited year. - Exceptional temporary monetary financing in emergencies is allowed in a minority of laws with safeguards: - Seychelles: Section 40A allows temporary waiver in emergencies (including natural disasters) with ministry report, presidential approval, publication, safeguards on rates and compatibility with monetary policy objective. - Barbados: Section 62 (2) permits, when a public emergency is declared, purchases on primary market not exceeding 3 percent of GDP with maturities up to 5 years and market rates, no rollovers. - Prevalence: 8 percent of central bank laws allow temporary exceptions for unforeseen emergencies; 92% have no such exception (Figure 2). - Design considerations: emergency financing should be temporary, subject to ceilings, repayment, market interest rates, transparency and procedural safeguards; distinct from long-term climate financing. ### Distinctions: temporary emergency financing vs long-term climate financing and quasi-fiscal operations - Temporary emergency provisions for natural disasters are not designed to support long-term climate mitigation, adaptation, or transition policies. - Governments should establish dedicated funds for climate measures; central bank lending risks being quasi-fiscal operations (QFAs) with allocative effects and fiscal consequences. - QFAs may create reputational and financial risks for central banks and risk fiscal dominance; recommended safeguards include explicit State guarantee and implementing measures through separate legal structures independent from central bank balance sheet. ### Advisory role and capacity building - Central banks typically have advisory roles enabling cooperation with government on economic and financial issues; such consultative roles that do not expose the balance sheet are unlikely to raise legal controversies. - Central banks have contributed to climate-related information, analysis, and capacity building: data collection, identifying data gaps, supporting taxonomies, pilot projects, and statistical work (examples: Bank of Canada pilot with OSFI; Deutsche Bundesbank as observer; Bank of England criteria for rebalancing corporate bond purchases; DNB urging government first steps in post-Covid recovery). - Distinguish these informational and advisory activities from macroprudential functions. ### Official Foreign Reserves (OFR) management and sustainability considerations - Best practice: OFR management should ensure adequate level, liquidity, and accessibility for balance of payments financing, exchange market intervention, and confidence in the currency; reserve assets should represent claims on non-residents accessible on demand. - Minority practice: 21 percent of central bank laws provide general guidance to consider in investment strategy; 79% include no such guidance (Figure 3). - Statutory examples: Article 137 (Law on the Central Bank of Ecuador) prioritizes “security, liquidity and profitability in this order”; Article 52.2 (Central Bank of Armenia Law) lists security and liquidity as primary criteria. - Central banks increasingly adopt sustainable and responsible investment (SRI) practices: - Sveriges Riksbank (2019): take account of sustainability in asset choice without negatively affecting preparedness. - DNB: Responsible Investment Charter, ESG screening and promoting green finance. - Banco Central do Brasil: sustainability criteria for selection of counterparties and investments. - Foreign exchange reserves may be distinct from OFR and portions can be allocated to sovereign wealth funds (SWF); decisions by large SWFs (e.g., Norway’s) can provide leadership signals. ### Integration approaches for climate in OFR management (paragraph 44) - Implicit integration: introduce SRI into standing policy objectives recognizing indirect ways climate policies could jeopardize fulfillment of OFR objectives and core duties. - Explicit integration: amend legal framework to include "climate change mitigation, adaptation, and transition considerations" as an objective for OFR—this requires legal change and may face political constraints. - Trade-offs: sustainability objectives can conflict with liquidity, safety, and return; any sustainability objective should be subsidiary and not impair the ability to use OFR for intended public policy purposes. - BIS research note: "sustainability objectives can be integrated into reserve management frameworks without forgoing safety and return"; no evidence so far that integrating sustainability into OFR ensures necessary liquidity. ### Institutional arrangements, decision-making, expertise, and taxonomies - Central bank laws set arrangements to ensure autonomous and high-quality decision-making; these arrangements are essential to legitimate state power exercises. - Decision-making structures should develop expertise, modelling, and data to incorporate climate issues into economic and financial assessments and determine policy instruments (eligible assets, collateral). - Risk: measures that set incentives to de-carbonize or determine transition targets may step into government functions or invite political intervention. - Coordination: multiple decision-making bodies (oversight board, MPC, FPC) must coordinate on climate issues; Bank of England provides coordination example (shared chair, Deputy Governor roles, joint briefings). - Governance options: dedicated units or executive directors for climate coordination (example: DNB’s Sustainable Finance Office; ECB’s climate change center). - External expertise: can support SRI implementation (example: Swiss National Bank uses external firms for ESG evaluation; final exclusions decided by SNB). - Autonomy and legal scope: guidance from government on climate should be clearly founded in law; examples show risk to autonomy if scope is not well defined (Reserve Bank of New Zealand Financial Policy Remit example). - Taxonomy role: adopting green taxonomies set by politically accountable bodies with sound scientific basis can anchor decisions, improve measurement, consistency, and prevent “greenwashing”; central bank involvement in taxonomy development should be assessed carefully. ### Inter-agency coordination, transparency, and accountability - Inter-agency committees (Macroprudential Committee, dedicated "climate committee") can coordinate while ensuring agencies act within legal mandates. - MoUs can aid coordination but cannot substitute for legislation. - Enhanced transparency is needed as central bank roles broaden on climate: - IMF Central Bank Transparency Code principles relevant to climate: disclosure of principal risks and risk strategy (principle 1.5), disclosure of monetary policy operational frameworks (principle 3.1.1), and disclosure of implementation outcomes (principle 4.4). - Central banks should adopt procedural safeguards, ex ante guidance, due process, public consultation, mission statements, and communication strategies to enhance accountability and public understanding. - NGFS Legal Task Force survey: 50 percent of respondents reported first steps to address climate-related litigation risks; 22 percent explicitly said no such measures had been implemented. Actions reported include data gathering, integrating risks into portfolios, contributing to taxonomy development, publishing guides, establishing working groups, and public consultations. ### Conclusions on scope and permissible actions; key considerations (paragraphs 59–61 and summary table) - Statutory mandates must clearly establish hierarchies among objectives and primacy of price and financial stability to ensure legitimacy and legal certainty. - Primary responsibility for climate response rests with the government; central banks should not overstep into politically accountable bodies. - When climate affects core objectives (price and financial stability), central banks are mandated, within legal frameworks, to adopt measures addressing climate risks—this does not create a separate climate mandate. - Permissible (less legally controversial) central bank actions: - Provide technical advice within expertise; - Raise awareness of financial firms’ exposure to climate risks; - Collect and analyze data for statistical purposes; - Integrate climate concerns into monetary and macroprudential modelling and analysis; - Evaluate material climate risks in asset eligibility and collateral frameworks; - Exercise fiduciary responsibility by incorporating material climate risk evaluations into eligible asset frameworks; - Provide limited exceptional monetary financing to alleviate temporary effects of unforeseen weather events, without prejudice to price stability and public debt levels. - Actions that expose central banks to legal, political, and reputational risks: - Providing credit to government to finance long-term climate responses; - Supporting governmental economic policies that could undermine price or financial stability; - Favoring specific sectors/assets in monetary operations without complying with proportionality, objectivity, and non-discrimination; - Designing credit policies to promote structural green economy policies departing from financial stability; - Investing OFR to pursue sustainability objectives without considering liquidity or safety; - Exceeding legal constraints and entering the realm of politically accountable bodies. - Institutional adjustments required if additional climate tasks are assigned: decision-making, accountability, and transparency frameworks must be adjusted; safeguards needed to protect central bank autonomy; clear delineation of responsibilities between central banks and governments; enhanced public communication and mission clarity. *Source: IMF Working Paper "Central Banks and Climate Change: Key Legal Issues" (excerpt: Introduction and Part II — The Legal Framework of Central Banks and Climate Change).* ### References ............................................................................................................. ### IMF WORKING PAPERS Central Banks and Climate Change: Key Legal Issues ### I. Introduction — central messages - The Paris Agreement and the COP28 Agreement are described as "landmark international binding treaties" with the common goal to combat climate change and adapt to its effects; the Agreement aims to hold the increase in the global average temperature to below 2oC, preferably to limit the temperature increase to 1.5oC above pre-industrial levels. - Implementation of the Agreement requires economic and social transformation; countries undertake nationally determined contributions and communicate efforts to build resilience to greenhouse-gas emissions. - Climate change is a critical macroeconomic and financial policy challenge for the financial sector and the IMF’s membership; for the first time both the G7 and G20 presidencies have included climate action among their policy priorities. - The Network for Greening the Financial System (NGFS) shares voluntary best practices on environmental and climate risk management; as of May 29th, 2024, the NGFS has 141 members and 21 observers. - The IMF contributes in its core areas (including Article IV consultations, lending facilities, and institutional cooperation); the Resilience and Sustainability Trust (RST) is cited as one main contribution to provide policy support and affordable longer-term financing. - Physical risks (increasing severity and frequency of extreme weather events and longer-term shifts) and transition risks (adjustment toward a low-carbon economy affecting asset values) could produce severe disruptions to price and financial stability and potentially initiate systemic financial crises. - The paper assumes primary responsibility for national climate policy rests with governments; it examines whether and how central banks can integrate and support climate-related policies within their current legal frameworks and mandates. - Central banks increasingly recognize physical and transition risks as bearing on their mandates of price and financial stability and have adopted actions to integrate climate change into activities, but the contours of permissible roles depend on each central bank's specific legal regime, capacity of other institutions, and institutional interactions with government. - The paper does not systematically distinguish among mitigation, adaptation, and transition policies unless specifically mentioned; it notes these commonly used policy categories are sometimes unhelpful in assessing legality of central bank actions. ### Key legal and institutional principles highlighted - Central banks are public institutions and can legally act only within their legal mandate; autonomy and accountability require clear legal objectives, functions, and powers. - A clear statutory mandate that indicates hierarchy when multiple objectives are assigned and establishes the primacy of price and financial stability is essential for legitimacy and legal certainty. - Legal certainty reduces reputational, legal, and political risks; a vague or missing mandate could affect central bank autonomy and credibility and expose monetary policy to fiscal dominance. - The objective of the paper is to advance legal understanding of the intersection between central banking law and climate change under current legal mandates; it takes stock, compares approaches, and identifies legal considerations impacting decisions and policies without prescribing permissible activities or opining on specific overreach. - The analysis focuses primarily on legal formulations of objectives regarding price and financial stability, support of government economic policy, and economic development; it reflects diverging jurisdictional approaches. ### Institutional arrangements and safeguards - Well-designed institutional arrangements grounded in sound legal basis support legitimacy of autonomous central bank decision-making and can prevent encroachment into the remit of fiscal authorities. - The paper flags decision-making arrangements, operational autonomy, transparency, and accountability as critical considerations relevant also to banking supervisory agencies (noting a parallel working paper covers banking law and climate change). ### Scope limitations - The paper does not discuss broader societal environmental issues not directly climate-related (e.g., air pollution, water pollution, land contamination, reduced biodiversity, deforestation). - It presents legal analysis based on selected climate change measures adopted or discussed by central banks in different jurisdictions; this is comparative, not exhaustive, and recognizes law can change. - The paper does not determine whether international environmental obligations directly constrain central banks; it notes that whether international agreements impose obligations on central banks is a matter of national constitutional law and transposition into domestic law. - Climate-related litigation is increasing, including cases involving governments and financial authorities; one central bank has been sued to press for greater inclusion of climate concerns in policymaking (see mention of ClientEarth case in Box 1). ### II. The legal framework of central banks and climate change — core findings - Central banks operate within a multi-layered legal framework: constitution (in some jurisdictions), organic central bank law, other relevant laws, and secondary legal instruments (e.g., by-laws). - The organic central bank law typically establishes the bank’s objectives, functions, powers, decision-making bodies, and autonomy; secondary instruments detail governance and operations. - Some commentators argue for limiting central bank mandates to price and financial stability to preserve focus and autonomy. - Specific constitutional or statutory provisions may affect central bank obligations in relation to international agreements (example cited: Article 216(2) of the Treaty on the Functioning of the European Union and European Parliament conclusions regarding the ECB and the Paris Agreement). - National constitutional law determines (i) whether and how international agreements supersede national law, (ii) whether environmental protection provisions in constitutions supersede conflicting domestic laws, and (iii) whether international agreements impose obligations on central banks. - Central banks and their officials could be exposed to human rights and climate-related litigation as such cases have proliferated since adoption of the Agreement. ### Enumerated items and listings from the source - Boxes (listed in source): - 1. ClientEarth v NBB - 2. Legal Mandates of Central Banks: The Concept & Attribution of Powers - 3. Examples of Central Bank Development Programs Supporting Climate Change Policies - 4. The principles of proportionality, objectivity and non-discrimination - 5. Country Examples of Inclusion of Climate Change Considerations into their Monetary Policy Frameworks - 6. Bank of England: Coordination MPC and FPC - Figures (listed in source): - 1. Development Function - 2. Exceptional Monetary Finance - 3. Guidelines for Investment Reserves *Source: IMF Working Paper "Central Banks and Climate Change: Key Legal Issues" (excerpt: Introduction and Part II — The Legal Framework of Central Banks and Climate Change).* ### Box 1. ClientEarth v NBB ### Box 1. ClientEarth v NBB ### Case summary - ClientEarth, a non-governmental organization, filed a suit against the Banque Nationale de Belgique (NBB) for failing to meet environmental, climate, and human rights requirements when purchasing bonds from greenhouse-gas intensive companies under the European Central Bank (ECB) and European System of Central Banks (ESCB)'s Corporate Sector Purchase Programme (CSPP). - Under the CSPP, six national central banks (Belgium, Germany, France, Spain, Italy, and Finland) purchase bonds from eligible companies to improve financing conditions by lowering debt costs. ### Legal arguments advanced by ClientEarth - ClientEarth argued that the ECB failed to assess the climate impact of buying corporate assets, despite legal obligations to do so, and therefore: - The ECB’s decision to establish the CSPP would be invalid. - The NBB’s implementation of this decision would be illegal. - ClientEarth alleged that the ECB is both empowered and legally required to take proactive action on climate change on the basis that the ECB and ESCB: - (i) have a primary mandate to take action to mitigate systemic risks and help prevent them from materializing, given that climate change is a systemic risk that threatens both price stability and financial stability; - (ii) have to take into account the EU’s climate objectives and policies and ensure it acts consistently with them, which necessarily involves reducing the impact of its programs on climate change and human rights, and supporting the transition to a net zero economy; and - (iii) need to mitigate the climate related financial risks to which its corporate asset portfolios are exposed. - ClientEarth claimed that the CSPP exacerbates the climate crisis, and that the NBB's participation in the CSPP violated the Treaty on the Functioning of the European Union (TFEU) and the Charter of Fundamental Rights of the European Union (EU). ### Procedural history and outcome - ClientEarth pursued a preliminary reference to the Court of Justice of the EU to determine the validity of the CSPP under EU law. - In December 2021, the Brussels Tribunal of First Instance rejected ClientEarth's application on procedural grounds. - ClientEarth appealed the judgment and, after reforms to the Eurosystem’s Corporate Sector Purchase Program (which tilted central banks’ corporate bond purchases away from companies with poor climate performance to those with better ones), withdrew the case. ### Implications highlighted in the source context - The case illustrates tensions between central bank involvement in asset purchases and obligations to consider environmental, climate, and human rights impacts under applicable law. - It exemplifies claims that central banks and the Eurosystem may be required to consider climate-related systemic risk in designing and implementing monetary policy operations such as the CSPP. *Sources: Grantham Research Institute on Climate Change and the Environment (London School of Economics); ClientEarth v. Belgian National Bank - Belgium - Climate Change Laws of the World (climate-laws.org); Linklaters (2021) and (2022); ClientEarth (2021).* ### 20. Macroprudential responsibilities are typically assigned to the monetary authority or among ### 20. Macroprudential responsibilities are typically assigned to the monetary authority or among ### Central bank role in climate-related macroprudential policy - Macroprudential arrangements usually assign a key role for the central bank given its core stability objectives. - Example institutional initiatives: - The USA’s Federal Reserve Board of Governors has established a Financial Stability Climate Committee (FSCC) to identify, assess, and address climate related risks to financial stability; the FSCC will approach this work from a macroprudential perspective—that is, one that considers the potential for complex interactions across the financial system. - The Reserve Bank of New Zealand’s Climate Change Strategy (published in 2018) includes an in-depth analysis of the potential implications of climate change for financial stability. - The Mexican Financial Stability Council (in which the central bank has a prominent role) approved the regulatory framework for the Sustainable Finance Committee to promote the transition towards sustainable finance and the adoption of international best practices that contribute to the stability of the financial system, and has assessed the results of the analysis of the exposures of the banking system regarding climate and environmental risks. - Central banks, financial supervisors, and regulators have integrated climate considerations into monitoring and prudential supervision, developing methodological frameworks (e.g., stress-testing and scenario analysis), bridging data gaps, and raising awareness among financial sector firms of their exposure to climate risks. - Reserve Bank of Australia monitors climate risks as part of its financial stability mandate by incorporating potential impacts of climate change into the outlook for the economy and monitoring evolving risks to financial institutions. ### Legal mandate, boundaries, and alignment with financial-stability objectives - Central banks can adopt actions addressing climate-related financial stability impacts when those impacts fall within their mandate. - Many central banks have integrated climate considerations into traditional financial stability frameworks and objectives without adjusting their legal mandate. - Legal interpretation points: - Incorporation of climate considerations does not appear to provide an independent mandate for central banks to introduce measures to promote climate change policies; integration should be pursued in the service of the financial stability mandate. - Central bank actions should remain fully aligned with their legal framework to prevent legal, political, and reputational risks. - Recommendation: to prevent legal uncertainty, central bank actions on climate should be clearly within the legal remit and hierarchy of objectives. ### Support of the government’s economic policy and economic development - Many central bank laws list support to the government’s economic policy or economic development as an objective, with different legal formulations. - Examples and legal formulations: - Article 127(1) TFEU: in addition to maintaining price stability, the ECB and ESCB shall support the general economic policies in the Union with a view to contributing to the objectives in Article 3 TEU; Article 3(3) TEU includes “a high level of protection and improvement of the quality of the environment”. - Bank of England: Section 12 (1) of the Bank of England Act allows the Chancellor to specify “what price stability is to be taken to consist of” and, subject to that, “what economic policy is to be taken into account” by the MPC. On November 22, 2023, the Chancellor updated the MPC’s remit to explicitly “confirm that the government’s economic policy objective is to achieve strong, sustainable and balanced growth”, and the government’s economic strategy includes “supply side reforms to promote sustainable growth in all parts of the UK by supporting a dynamic business environment, increasing long-term energy security and delivering Net Zero”. The Bank of England’s MPC has been explicitly mandated to incorporate environmental considerations into monetary policy decisions. - Legal uncertainty in absence of explicit climate reference: - A central bank’s subsidiary objective to support “the government’s economic policy” is different from environmental and climate policies and may not provide a clear legal basis to support climate change policies. - Conversely, if a government’s economic policy includes climate or environmental policies, that subsidiary objective might serve as a legal basis for central bank support. - IMF staff view: if the legislature wants the central bank to pursue climate objectives, this is best established by inserting an explicit reference to (sustainable) environmental policy in the central bank’s subsidiary objective(s), or by the government clarifying that its economic policy includes environmental objectives. - The 2021 change to the law governing the Magyar Nemzeti Bank (MNB) illustrates the need for legal certainty. - Hierarchy of objectives: - The ECB/ESCB example specifies that any support to government economic policies must be implemented “without prejudice to the primary objective of price stability,” illustrating a hierarchy among objectives. - IMF staff consistently recommend including a well-defined hierarchy in central bank laws to avoid conflicting policy decisions and to reduce political and reputational risks. - Prevalence of developmental mandates: - 73% of central bank laws (specifically those in emerging economies) contain broader mandates allowing promotional activities. - 26% and 1% appear in the source graphic as the other categories adjacent to 73% (labels in the figure: “Development Function”, “Development/Economic Function Supported”, “No Development or Economic Policy Objective”, “Uncertain” — the text notes the figure is based on an analysis of 169 legal frameworks). - “Promotional” or developmental objectives are broad and can cover social and economic issues in addition to environmental ones; however, climate concerns were generally not envisaged when many of these objectives were drafted. - Legal certainty would favor explicit wording enabling a central bank to support a government’s climate change policy. Even where sustainable development objectives exist, the primary responsibility for environmental policy rests with the government and any central bank role is ancillary and must fit within the hierarchy of objectives, functions and powers. ### Examples of central bank development programs supporting climate change policies (Box 3) - Bangladesh Bank (BB) - Historically issued a product list of 55 green products/projects/initiatives (2017); updated to 68 in Sustainable Finance Policy (2020); further enhanced to 70 in 2023. - Quota: 5 percent of all loan disbursement and investments for green financing and 20 percent of all loan disbursement and investment for Sustainable financing. - Refinance schemes and funds: Technology Development Fund (TDF) (BDT 10 billion), Green Transformation Fund (GTF) (BDT 50 billion, USD 200 million, Euro 200 million), Refinance Scheme for Green Products/Projects/Initiatives (BDT 4 billion), ADB supported Financing Brick Kiln Efficiency Improvement Project (USD 50 million). - Issued Policy on Green Bond Financing for banks and non-bank FIs (2022); introduced Sustainability Rating for Banks and non-bank FIs (2020); updated ESRM guideline with 10 sector-specific ESDD check lists (2022); working on Green Credit Guarantee Scheme under BEST Project. - Monetary Authority of Singapore (MAS) - Operates a Sustainable Bond Grant Scheme to defray costs of external reviews for green, social, sustainability and sustainability-linked bonds; more than S$8 billion in green, social and sustainability bonds have been issued in Singapore since 2017. - Intention announced to launch a grant to support sustainability-linked loans. - Bank Negara Malaysia (BNM) - Adviser role in Governmental Green Technology Financing Scheme (GTFS) with initial allocation RM1.5 billion, later increased with additional RM2.0 billion. - Government guarantees 60 percent of financing via Credit Guarantee Corporation Malaysia Berhad (CGC) and bears 2 percent of total interest or profit rate. - Bank of Korea - Published a paper noting intent to “seek ways to utilize lending, payment and settlement and open market operations” to encourage a smooth supply of funds to the eco-friendly sector; considering support for “green growth companies” through its bank intermediation support facility. - Banco Central do Brasil (BCB) - New sustainability agenda foresees a role in allocation of resources toward a more sustainable economy; established a sustainable liquidity facility involving feasibility study and possible implementation of a new facility for financial institutions whose eligible collateral include private equity and credit claims. *IMF Working Paper excerpt: Central Banks and Climate Change: Key Legal Issues* ### 30. As the concept of a central bank’s developmental role is evolving, legal certainty would argue ### 30. As the concept of a central bank’s developmental role is evolving, legal certainty would argue ### Legal basis and overarching considerations - Legal certainty supports a clear (subsidiary) objective for a central bank to take a more prominent role in addressing climate change concerns only insofar as the legislature assigns that role to the central bank. - Primary political responsibility for addressing climate risks rests with the government and the fiscal purse; central bank programs addressing climate concerns could be qualified as quasi-fiscal operations if the central bank lends instead of the government. - Allocation of developmental/climate objectives to a central bank risks overburdening mandates and undermining central bank autonomy, which is crucial for price stability. - Given associated risks, assigning such objectives to a central bank merits high levels of transparency and accountability by the central bank. ### Risks: market distortion, political/reputational/legal exposure - Central bank programs not well designed could create market distortionary effects. - Non-compliance with the principles of proportionality, objectivity, and non-discrimination might expose a central bank to political, reputational, and legal risks when third parties disagree with operational decisions. - These issues require difficult trade-offs between different policies and careful distinction between monetary policy and fiscal policy. ### Principles of proportionality, objectivity, and non-discrimination (Box 4) - These principles guide sound and objective operation of a central bank and are explicitly in some central bank laws or arise under general administrative law. - Under the EU framework: - Article 127 TFEU requires the ECB and ESCB to act in accordance with the principle of an open market economy with free competition, favoring an efficient allocation of resources; market neutrality “forms part of the principle of an open market economy with free competition”. - The ECB/ESCB note they are also required to support the general economic policies in the Union, which include the sustainable development of the EU based on “a high level of protection and improvement of the quality of the environment”. - The dynamic concept of market neutrality argument: evidence that market prices materially under-estimate risks and opportunities associated with the transition to net zero; if markets fail to price climate risks, a central bank might take them into account in asset purchase and collateral policies, subject to objective and scientifically grounded determinations. - Legal formulations and examples: - Section 31 (1) of the Autoriti Monetari Brunei Darusssalam Order 2010: Monetary Authority must use powers equitably and uniformly, impartially, and motivated only by objective and rational considerations. - Article 9(2) of the Law on the National Bank of the Republic of North Macedonia: decisions “shall be impartial and based only on objective and rational considerations. They shall be executed in a fair, indiscriminatory and deliberate fashion”. - Article 74 (2) of the National Bank of Moldova: decisions to be impartial, based merely on objective reasons and strictly and correctly executed. - Sveriges Riksbank is covered by requirements of legality, objectivity, and proportionality via the Administrative Procedure Act. - Bank of Japan statement: “in taking actions from the monetary policy side, the Bank deems it important to give consideration to market neutrality”. - Courts’ use of proportionality: - German Constitutional Court and Court of Justice of the EU applied proportionality in reviewing OMT and PSPP, using similar proportionality definitions but reaching differing conclusions. - German Constitutional Court: proportionality is satisfied only if it is a “suitable and necessary means for achieving the aim pursued”. - Court of Justice of the EU: acts must be suitable for attaining legitimate objectives and not go beyond what is necessary. ### Functions and powers: monetary policy, monetary operations, and climate - Central bank core functions often include: (i) the formulation and implementation of monetary policy, (ii) granting credit to the government, (iii) providing advice to the government, and (iv) holding and managing the official foreign reserves (OFR). - Organic laws typically authorize monetary operations such as outright sales and purchases, repurchase agreements, Lombard loans, swaps and other derivative transactions. - Climate risks affect variables relevant to monetary policy (output, investment, employment, consumption, growth, productivity, wages, international trade, inflation) and thus can be relevant to monetary policy formulation and transmission. - Incorporating climate-related effects into monetary policy is consistent with central banks’ duty to ensure price stability and does not inherently raise legal concerns nor require changes to central bank laws. - Central banks have incorporated climate considerations into eligible assets, collateral, and risk management frameworks to support price stability objectives. ### Country examples of climate considerations in monetary policy frameworks (Box 5) - China: - April 2021: People’s Bank of China (PBoC) announced measures to green monetary and financial policies: include green bonds and green credit as eligible collateral, limit investments in high-carbon assets, add green bonds to foreign exchange reserves. - 2021: PBOC launched the carbon emission reduction facility (CERF); a structural monetary policy instrument aiming to provide low-cost funds to financial institutions and guide carbon reduction loans at rates close to the Loan Prime Rate of the same maturity. - United Kingdom: - Bank of England Market Notice (November 2021): target a 25 percent reduction in the weighted average carbon intensity of its Corporate Bonds Portfolio Scheme (CBPS) by 2025, and full alignment with net zero by 2050. - Purchases will be “tilted” towards stronger climate performers within sectors; firms must satisfy climate-related eligibility criteria. - ECB/ESCB: - 2021 monetary policy strategy review: climate is a policy priority; decided to (i) develop macro-economic modelling and statistics of climate change, and (ii) adapt monetary policy operational framework regarding disclosures, risk assessment, corporate sector asset purchases and collateral framework. - ECB climate action plan concrete steps, implemented over time starting with October 2022: - gradually reinvest corporate bond holdings to issuers with better climate performance; - limit in the collateral framework the share of assets issued by entities with a high carbon footprint and consider climate risks when reviewing corporate bonds’ haircuts; - define compliance with the EU’s Corporate Sustainability Reporting Directive as an eligibility requirement for credit claims and marketable assets used for collateral; - enhance risk assessment tools and capabilities to include climate-related risks. - Japan: - Bank of Japan Strategy on Climate Change (July 2021): support private sector efforts to stabilize the macroeconomy in the long run; introduced a fund-provisioning measure providing funds to financial institutions against investment or loans they make to address climate change. - Framework designed to consider market neutrality and avoid direct micro-level resource allocation; financial institutions decide which investments/loans contribute to addressing climate change while complying with international standards or Japanese government guidelines. - First loans worth JPY 2.05 trillion (USD 18 billion) were disbursed on 24 December 2021 and will mature on 30 January 2023. - Canada: - Bank of Canada commitments for COP26: assess effects of climate change on macroeconomy and price stability; conducting research and developing new models and data sources to understand physical and transition effects on potential output, the labor market and inflation. - Sweden: - Sveriges Riksbank clarified that within asset purchases for the second half of 2022 it may continue to purchase green government, municipal, and corporate bonds. - As of September 1, 2022, Riksbank would only purchase non-financial corporate bonds issued by companies that report annual direct and indirect emissions in accordance with Task Force for Climate-related Financial Disclosures recommendations. - Riksbank’s Asset purchase program finished 31 December 2022. ### Legal and operational implications for green QE and asset eligibility - Incorporating climate risks into asset eligibility for collateral and asset purchase programs should fit within the central bank’s legal mandate and support price stability objectives. - Green QE purchases must fit within the price stability mandate to mitigate reputational, political, and legal risks. - Decisions on asset eligibility are technical and should not impair monetary policy effectiveness or the central bank’s ability to meet mandated objectives, especially if the pool of “green” assets is not sufficiently deep. - In jurisdictions where proportionality, non-discrimination, or objectivity are prescribed, green QE policies must comply with these principles. - Key legal questions: - What scientific basis underlies labelling assets as “green”? - In the absence of taxonomies objectively identifying environmentally sustainable activities established by a politically accountable body with a sound scientific basis, use of “green” assets could expose central banks to reputational, political, and legal risks—especially if “green” assets are treated more favorably (e.g., lower haircut) without financial foundations for that differential treatment. - Preconditions noted in the literature for green QE policies include: - (i) a central bank to be autonomous, and - (ii) the jurisdiction to have credible macro-economic policies. - Transition from QE to Quantitative Tightening will “drastically reduce any opportunity to engage in ‘green’ asset prioritization for monetary policy operations, or for sustainability agendas based upon the exclusion of certain ‘brown’ assets from these bond-buying programmes.” *IMF Working Papers — Central Banks and Climate Change: Key Legal Issues* ### 34. Currently, many central bank laws prohibit monetary financing, or strictly curtail it. For example, ### wpiea2024192-print-pdf - 34. Currently, many central bank laws prohibit monetary financing, or strictly curtail it. For example, ### Prohibitions on monetary financing (legal examples and rationale) - Article 123 of the TFEU provides that the ECB and the national central banks of the ESCB may not grant public entities any type of credit facility or purchase debt instruments directly from them. - Section 39 of the Reserve Bank of Malawi Act limits the Reserve Bank’s short-term advances to the government to coverage of temporary shortfalls in budget revenues up to a maximum of 10 percent of the average inflation adjusted annual domestic revenue of the government for the past three financial years. - Section 28 (Reserve Bank of Malawi) restricts the Reserve Bank to purchasing government securities only on the secondary markets (as part of monetary policy operations). - Section 46(1) of the Central Bank of Kenya Act: advances to Government are permitted “for the purpose of offsetting fluctuations between receipts from the budgeted revenue and payments of the Government,” but such advances must be (i) secured with negotiable securities issued by the Government, (ii) bear interest rate at market rate, (iii) be made solely for temporary accommodation, and (iv) shall not exceed 5 % of gross recurrent revenue for the latest audited year. - These prohibitions and strict controls are important because, in their absence, monetary financing may pave the way for fiscal dominance. ### Exceptional, temporary monetary financing in emergencies (scope, examples, and prevalence) - A minority of central bank laws allow exceptions to the prohibition or limitation of monetary financing to mitigate severe, unforeseen emergencies, subject to preconditions. - Seychelles: the Central Bank Act allows advances to the government only within limits set by the Board and to address “temporary deficiencies in revenue”; Section 40A allows a temporary waiver in emergencies (explicitly including natural disasters) with procedural guarantees: a report of the Ministry of Finance on causes, presidential approval, and publication; safeguards on rates and compatibility with the monetary policy objective. - Barbados: Section 62 (2) of the Bank of Barbados Act permits, when a public emergency is declared, the Bank to purchase marketable securities issued by the government or any publicly owned institution on the primary market where the total amount acquired does not exceed 3 percent of gross domestic product; securities must have maturity up to 5 years, be issued at prevailing market rates, require repayment in cash, and prohibit rolling over or renewal. - During the Covid–19 pandemic, various central banks exceptionally provided some limited credit to governments (mostly advances or purchases of government bonds on the secondary market). - Prevalence: There are currently 8 percent of central bank laws which allow temporary exceptions to the general rules on monetary financing in the event of an unforeseen emergency; 92% have no such exception as presented in Figure 2. - Note: the cited examples are from island nations prone to natural disasters; similar provisions might be useful in other jurisdictions facing natural disaster risks. ### Design considerations and recommended safeguards for temporary emergency financing - Any exceptional monetary financing (purchases of government securities or loans) should be temporary and subject to explicit agreement on ceiling, repayment, and (market) interest rate. - Legal formulations should require that temporary monetary financing be without prejudice to the objective of price stability and public debt levels. - Central banks should be transparent about use of temporary exceptions and observe any statutory limitations and procedures. - An appropriate ex ante institutional mechanism could allow the central bank—under specific terms and criteria—to temporarily fund costs incurred by government in severe, unforeseen emergencies (such as natural disasters), while maintaining restrictions in normal times. ### Distinctions: temporary emergency financing vs. long-term climate financing and quasi-fiscal operations - Temporary monetary financing for unforeseen natural disasters is distinct from direct monetary financing of climate-related policies or long-term events; such temporary provisions were not designed to support long-term climate mitigation, adaptation, or transition policies. - Governments should establish dedicated funds to finance climate mitigation and adaptation measures; limited emergency exceptions do not, from a legal standpoint, justify a broad financing role for central banks in supporting governmental climate policies. - Quasi-fiscal operations (QFAs): - Can assign financial resources to support specific policies with allocative effects and affect the overall public sector balance without affecting the conventional budget deficit. - May create reputational and financial risks for the central bank, including losses that threaten financial autonomy and risk creating fiscal dominance. - Could require the central bank to demonstrate objective, equal treatment of comparable entities (e.g., observe market neutrality). - IMF staff cautions against using central bank assets for objectives departing from monetary or financial stability; when central bank assets are used in exceptional circumstances, staff advises increased transparency, accountability, and legal design features to mitigate risks, such as: - Providing an explicit State guarantee for the central bank’s operations; and - Implementing measures through separate legal structures, independent from the central bank’s balance sheet. ### Advisory role of central banks on climate-related and economic issues - Organic laws typically assign an advisory function to the central bank to enable cooperation and coordination with government on economic and financial issues (e.g., “act as advisor to the Federal government on economic and, particularly, financial issues” – Banco de Mexico Act). - Such an advisory and coordinating role can leverage the central bank’s perspective on three dimensions relevant to climate and financial stability: the “risk”, “time horizon” and “system resilience” approaches. - When limited to consultative activities that do not expose the central bank’s balance sheet, this advisory role is unlikely to raise legal controversies. ### Central bank contributions to climate-related information, analysis, and capacity building - Many central banks, consistent with their mandates, have contributed to understanding the economic impact of climate change, identifying data gaps, supporting taxonomies, and running pilot projects (e.g., Bank of Canada pilot with OSFI and six Canadian financial institutions on climate scenarios). - Examples: - Deutsche Bundesbank participated as observer in Germany’s Sustainable Financial Advisory Committee. - Bank of England listed criteria guiding rebalancing of its corporate bond purchase scheme (including incentivizing companies to achieve net zero). - De Nederlandsche Bank (DNB) argued that post-Covid recovery is an opportunity to accelerate a climate-neutral transition and that Governments should take first steps while central banks play a supporting role. - These contributions should be distinguished from macroprudential functions. ### Official Foreign Reserves (OFR) management and sustainability considerations - Best practice: central bank investment policies should ensure OFR are maintained at an adequate level and readily available for balance of payments financing needs, exchange market intervention, and maintaining confidence in the currency and economy; reserve assets should represent a claim on a non-resident accessible on demand. - Minority practice: 21 percent of central bank laws provide general guidelines which the central bank should take into account when determining specific investment strategy; 79% include no such guidance (Figure 3). - Examples of statutory investment guidance: - Article 137 (Law on the Central Bank of Ecuador): invest international reserves prioritizing “security, liquidity and profitability in this order”. - Article 52.2 (Central Bank of Armenia Law): lists security and liquidity of allocated resources as primary criteria. - Central banks are increasingly adopting sustainable and responsible investment (SRI) practices in portfolio management: - Sveriges Riksbank (2019): decided to take account of sustainability in asset choice without negatively affecting preparedness; considered climate impact in foreign currency reserves and adjusted holdings accordingly. - DNB: Responsible Investment Charter, screening investment universe and counterparties on ESG criteria, promoting green finance and responsible investing. - Banco Central do Brasil: new sustainability agenda indicating inclusion of sustainability criteria for selection of counterparties and investment decisions. - Note: foreign exchange reserves are not always qualified as OFR; portions can be allocated to sovereign wealth funds (SWF) managed by central banks; decisions by large SWFs (e.g., Norway’s) can provide leadership signals that may be more influential than central bank domestic balance sheet actions. *IMF WORKING PAPERS Central Banks and Climate Change: Key Legal Issues — excerpt from wpiea2024192-print-pdf* ### 44. Climate considerations could be integrated into central banks OFR management strategy. ### 44. Climate considerations could be integrated into central banks OFR management strategy ### Integration approaches for climate in OFR management - Implicit integration: introducing SRI into the standing policy objectives of the foreign exchange reserves (OFR), recognizing "the indirect ways in which climate policies could jeopardize the central banks’ fulfilment of the existing policy objectives for controlling the OFR and therefore the fulfillment of its core duties." - Explicit integration: amending the central bank’s legal framework so that "climate change mitigation, adaptation, and transition considerations" are specifically included as one of the objectives for holding and managing the OFR; practical implication: changing the central bank’s legal framework, which may face political constraints and raise questions about appropriateness in broader policymaking. ### Trade-offs and investment-criteria implications - Inclusion of a sustainability objective could create trade-offs with existing investment criteria: liquidity, safety, and return. - Concerns: - Additional complexity in OFR management and potential dilution of accountability. - Difficulty of pursuing all objectives jointly could impair the central bank’s ability to pursue core price and financial stability objectives. - Recommended framing: - Any additional sustainability objective should be "crafted as a subsidiary objective which should not affect the ability of the central bank to use the official foreign reserves for their intended public policy purposes." - Example cited: Swedish Riksbank’s decision to consider sustainability in asset choice applies under the assumption that this "does not negatively affect the Riksbank’s preparedness to use the official reserves" (see paragraph 43 in source). - Research notes: - BIS research: "sustainability objectives can be integrated into reserve management frameworks without forgoing safety and return".59 - No evidence so far that integrating sustainability into OFR investment can ensure the necessary liquidity of official reserves. - Operational implication: central banks should evaluate investment strategies and balance potential trade-offs within the constraints of their legal framework. ### Institutional arrangements and climate change: overview - Central bank laws set institutional arrangements to ensure autonomous and high-quality decision-making; these arrangements are essential to legitimize autonomous institutions conducting state powers. - The section analyzes interactions between central banks’ institutional arrangements and climate-related policies, noting potential tensions between autonomous decision-making and political decision-making when central banks act to support climate policies. ### Decision-making structures and expertise - Central banks should develop, within their legal mandate, expertise on climate issues to legitimize judgments and support climate policies; decision-making requires sufficient expertise, analytical frameworks (economic modelling), and ample data to: - Incorporate climate issues into economic and financial assessments. - Determine policies and operations (e.g., listing eligible assets for outright or repo transactions, eligible securities for monetary operations).61 - Conceptual position: - If climate issues are captured as risks to price or financial stability, central banks can address them within current mandates using existing tools. - Risk: measures that set incentives to de-carbonize the economy or determine targets and pace of action could differ from technical judgement and may exceed legal basis, risking (i) stepping on governmental functions or (ii) political intervention into central bank policy-making. - Coordination needs: - Multiple decision-making bodies (oversight board, Monetary Policy Committee (MPC), Financial Policy Committee (FPC)) must coordinate on climate issues to ensure consistent policy formulation. - Example: Bank of England’s MPC and FPC coordination mechanisms include shared chair, Deputy Governors participation, access to information, joint briefings, and joint staff analysis (Box 6). - Governance options: - Oversight boards should consider structures to coordinate climate-related policies and manage trade-offs. - Options include dedicated units or executive directors for climate coordination; examples: DNB’s Sustainable Finance Office (SFO) and the ECB’s climate change center, with activities across multiple workstreams (monetary policy to prudential functions).64 ### Use of external expertise and SRI implementation - External experts can support SRI approaches and implementation. Example: Swiss National Bank (SNB) employs ESG criteria in equity portfolio management via a selective exclusion policy, using external firms for two-stage evaluation; final exclusion decisions remain with the SNB. ### Autonomy, legal scope, and taxonomies - Climate change does not alter autonomy’s legal foundations but can expose weaknesses (e.g., government pressure to use monetary operations to support transition agendas, exposing the balance sheet). - Guidance from government on climate should be clearly founded in law; degrees of autonomy vary across functions (monetary policy vs. fiscal agent or exchange control). - Example: Reserve Bank of New Zealand Act reforms include a Financial Policy Remit issued by the Minister of Finance; remit could require the Board to "have regard to climate change risks when pursuing the financial stability objective." Such arrangements aim to balance operational autonomy and democratic influence but could undermine autonomy if scope is not well defined. - Taxonomy role: - Adopting a "green" taxonomy set by politically accountable bodies with sound scientific basis can anchor climate-related decisions and provide cover for central bank decisions when using or excluding assets. - Central banks should ground asset purchase, collateral, and risk assessments in transparent criteria; defining "green" vs "brown" assets is not a purely economic exercise. - Central banks’ involvement in taxonomy development should be carefully assessed; harmonized taxonomies can improve measurement of risks and financial flows, consistency, comparability, disclosure, and help prevent "greenwashing."65 66 67 ### Inter-agency coordination - Carefully designed inter-agency committees (e.g., Macroprudential Committee or dedicated "climate committee") can coordinate climate policies among government agencies and an autonomous central bank. - Institutional arrangements must ensure each agency acts within its legal mandate while respecting agency autonomy. - Memoranda of understanding (MoUs) can aid coordination but cannot substitute for underlying legislation that provides the basis for inter-agency policy coordination. ### Transparency and accountability - Broader central bank roles incorporating climate issues require greater transparency in legal frameworks. - The IMF’s Central Bank Transparency Code includes principles relevant to climate integration: disclosure of principal risks and overall risk strategy (principle 1.5), disclosure of monetary policy operational frameworks (principle 3.1.1), and disclosure of implementation outcomes (principle 4.4).68 - Enhanced transparency supports higher scrutiny and inputs from financial industry, academics, and NGOs, and is necessary to maintain public support, safeguard independence, and enhance policy effectiveness. *Source: wpiea2024192-print-pdf - 44. Climate considerations could be integrated into central banks OFR management strategy.* ### 57. Central banks should be transparent and accountable for their decisions. This seems to be of ### 57. Central banks should be transparent and accountable for their decisions. ### Transparency and accountability for climate-related operations - Central banks accepting or using specific assets in monetary policy operations (or investment decisions) must be transparent and accountable for such decisions. - Operations focusing on specific assets could be perceived as a signal and could influence markets that might follow the central bank’s example. - To avoid potentially political or non-economic decisions, and to enhance transparency, accountability, and legitimacy, use of “taxonomies” set by the governments and adequately grounded in sound scientific basis is suggested. - Central banks should consider mechanisms to enhance procedural safeguards and enable public scrutiny, such as developing ex ante guidance, due process, and public consultation with stakeholders. - Central banks could explore adopting mission statements or similar documents to clarify their stance and legal mandate (see paragraph 12). ### Accountability framework and legal mandate - Central banks act autonomously but are accountable to political bodies (e.g., legislatures) for their decisions; the legal mandate delineates actions and serves as a benchmark to assess fulfillment of intended goals. - Central banks’ support to climate policies should fit within their legal frameworks to prevent political and reputational risks as well as legal challenges. - To preserve autonomy in policy and operations, central banks need a sound legal basis for their actions and should enhance public understanding by explaining the rationale and limitations of their actions based on their statutory mandate. - Issuing a mission statement, complemented with a well-designed communication strategy, could enhance accountability and transparency. - Interaction with political bodies and the public helps central banks formulate their stance on climate change and enhances legitimacy. ### Empirical finding from NGFS survey (footnote 69) - The NGFS Legal Task Force survey among members found: 50 percent of respondents reported they have taken first steps to address climate-related litigation risks, but 22 percent explicitly said that no such measures had been implemented. - Actions reported include: gathering better understanding of climate change related risks relevant to mandates and operations; providing climate related data and information; integrating risks into central banks’ own portfolios and/or into broader risk management frameworks; contributing to development of taxonomies; publishing guides; establishing working groups or specific units; and starting public consultations. ### Conclusions on scope and permissible actions (Paragraphs 59–61) - Statutory mandates that clearly establish a hierarchy when multiple and potentially conflicting objectives are assigned—providing primacy of the price and financial stability objectives—are essential to ensure legitimacy and legal certainty. - Primary responsibility to contribute to climate response rests with government; central banks should not overstep into the realm of politically accountable bodies or exceed their mandate. - When climate change affects central banks’ core objectives (price and financial stability), central banks are mandated, within legal frameworks, to adopt measures to address climate risks; this does not necessarily establish a separate mandate to address climate change. - Central banks could, within existing mandates and from a legal standpoint, take uncontroversial actions such as: - supporting governments by providing sound technical advice within their expertise; - raising awareness of financial firms’ exposure to climate risks; - collecting and analyzing data for statistical purposes; - incorporating climate concerns into monetary and macroprudential modelling and analysis to assess impacts on price and financial stability; - evaluating potential material climate risks when determining eligibility of assets for collateral and asset purchase programs; - exercising fiduciary responsibility by incorporating material climate risk evaluations into frameworks for eligible assets, collateral, and risk management; - providing limited exceptional monetary financing to alleviate temporary effects of unforeseen weather events, without prejudice to price stability and public debt levels. - Actions that could expose central banks to political, reputational, and legal risks include: - providing credit to the government to finance long-term governmental responses to climate change; - supporting governmental economic policies that could undermine price or financial stability objectives; - entering monetary operations to favor a specific sector or assets creating market distributional effects unless complying with proportionality, objectivity, and non-discrimination; - designing credit policies to promote structural policies (green economy) departing from financial stability; - investing official foreign reserves to pursue sustainability objectives without considering liquidity or safety; - exceeding legal constraints and entering the realm of politically accountable bodies, which could prompt legal challenges and reputational harm and hinder the central bank’s credibility and ability to achieve price and financial stability. ### Institutional adjustments if additional climate tasks are assigned - If additional tasks are legally allocated to central banks that depart from core objectives of price and financial stability, decision-making, accountability, and transparency frameworks must be adjusted to balance autonomy. - Adequate safeguards should be established to shield central banks’ personal, institutional, operational, and financial autonomy required to achieve their current mandate. - Assigning climate-related objectives to central banks involves difficult trade-offs and potential market distributional effects; to mitigate legal, political, and reputational risks there should be: - a clear delineation of responsibilities between central banks and governments, particularly when central bank actions reflect political decisions; and - efforts to enhance public understanding of the central bank’s role and limitations. ### Key considerations (as summarized in the Table) - 1. A clear and well-defined legal mandate is critical to delineate permitted actions and prevent legal, political, and reputational risks. Central banks’ support to climate policies should fit within their legal framework. (#11, 22, 33 and 58) - 2. Climate change could impact the central bank’s mandate; central banks should integrate climate impacts in pursuit of price and financial stability. (#15 and 22) - 3. If legislatures want central banks to pursue climate objectives, this is best included via explicit legal references to environmental policy in subsidiary objective(s); primary political responsibility for climate risks rests with government; poorly designed decisions could create market distortions and charging central banks with such tasks involves difficult trade-offs and preserves the monetary–fiscal distinction. (#25 and 30) - 4. Jurisdictions should assess whether legal formulations including economic or development policies extend to climate matters and could serve as legal basis for specific measures, with caveats on hierarchy of objectives, functions and powers, and primary government responsibility. (#29) - 5. Given climate effects on asset values and risk profiles, decision-making bodies should evaluate potential material risks when determining eligibility of assets for collateral and asset purchase programs; such decisions must not impair monetary policy effectiveness. (#33) - 6. Provisions allowing temporary monetary financing for unforeseen natural disasters could be useful in central bank laws, subject to robust safeguards (distinct from monetary finance to climate policies). (#36 and 37) - 7. When central bank assets are used in exceptional circumstances for objectives departing from monetary and financial stability, additional safeguards to increase transparency and accountability should be established. (#38) - 8. While integrating climate considerations into OFR management strategy, central banks should ensure liquidity, safety and return of invested OFR remain unimpaired. (#45) - 9. Decision-making bodies should ensure the central bank has sufficient expertise and ample data to incorporate climate issues into economic and financial assessments. (#47) - 10. Oversight bodies should ensure adequate coordination mechanisms to incorporate climate issues in policy decisions. (#49 and 50) - 11. When central banks take guidance from the government on climate change, scope and procedure for the guidance should be clearly founded in law. (#53) - 12. Adopting a “green” taxonomy—preferably set by politically accountable bodies with sound scientific basis—could anchor climate-related decisions (e.g., asset purchases or collateral); the central bank’s role in developing the taxonomy should be assessed. (#54) - 13. Carefully designed inter-agency committees can assist coordination on climate policies between government agencies and an autonomous central bank. (#55) - 14. As central banks’ roles broaden to incorporate climate issues, legal frameworks need greater transparency. (#56, 57 and 58) - 15. Central banks should consider mechanisms to enhance procedural safeguards and enable public scrutiny, such as ex ante guidance, due process, and public consultation. (#57) - 16. To preserve autonomy in policy and operations, central banks should have a sound legal basis for actions. (#58) - 17. To enhance accountability, transparency, and public understanding of their role in climate change, central banks could explain the rationale and limitations of their actions under their statutory mandate, for example by issuing a mission statement or similar document. (#58) *IMF WORKING PAPERS Central Banks and Climate Change: Key Legal Issues* ### 2021. Washington D.C. ### Central Banks and Climate Change: Key Legal Issues (Working Paper No. WP/2024/192) ### Overview - The content unit is a bibliography and reference list associated with the Working Paper titled "Central Banks and Climate Change: Key Legal Issues". - It compiles speeches, working papers, reports, legal judgements, central bank publications, and research on the intersection of central banking, monetary policy, financial stability, and climate change. ### Types of sources cited - Speeches and speech abstracts: - Kganyago, L. 2019. Public Lecture at University of Pretoria [Speech transcript]. South African Reserve Bank. Pretoria, South Africa. - Kuroda H.2021. The Bank of Japan's Strategy on Climate Change [Speech Abstract]. Bank of Japan. Tokyo. - Lagarde, C. 2021. Keynote Speech by ChrtistineChristine Lagarde, President of the ECB, at the ILF Conference on Green Banking and Green Central Banking European Central Bank. - Menon, R. 2020. Harnessing the Power of Finance for a Sustainable Future [Speech abstract]. Monetary Authority of Singapore. Singapore. - Powell, J. H. 2023. Panel on “Central Bank Independence and the Mandate – Evolving Views”, Symposium on Central Bank Independence, Sveriges Riksbank - Schnabel, I. 2021. “From Market Neutrality to Market Efficiency” [Speech Transcript]. ECB DG- Research Symposium “Climate Change, Financial Markets and Green Growth”. Frankfurt - Weidmann, J.2019. Climate Change and Central Banks [Speech transcript]. . Deutsche Bundesbank. Frankfurt - Wolden Bache, I. 2023. “Introductory Statement at Hearing of Norwegian Parliament’s Standing Committee on Finance and Economic Affairs”. Bank of International Settlements. - Powell, J. H. 2023. Panel on “Central Bank Independence and the Mandate – Evolving Views”, Symposium on Central Bank Independence, Sveriges Riksbank - Legal judgements: - Judgement of 11 December 2018, Weiss and others, C-493/17, ECLI:EU:C:2018:1000 - Judgement of 16 June 2015, Gauweiler and others, C-62/14, ECLI:EU:C:2015:400 - Central bank reports, statements, and strategies: - Policy Board of the Bank of Japan. 2021. Statement on Monetary Policy. - Sveriges Riksbank. 2020. “Sustainability strategy for the Riksbank”, Stockholm. - Sveriges Riksbank. 2022. “The Riksbank's purchases of bonds during the second half of 2022”. Stockholm - Reserve Bank of Australia. 2019. “Box C: Financial Stability Risks From Climate Change | Financial Stability Review” Reserve Bank of Australia Financial Stability Review. Sydney. - Reserve Bank of New Zealand. 2021.“Climate Change 2021 and Beyond”. Wellington. - The People’s Bank of China. 2021. “The People’s Bank of China launches Carbon Emission Reduction Facility, Press Release updated November 9, 2021”. - Network and multilateral reports: - Network for Greening the Financial System. 2019a. First Comprehensive Report, A Call for Action- Foreword by Frank Elderson. Paris - Network for Greening the Financial System. 2019b. A Call for Action: Climate Change as a Source of Financial Risk. NGFS, Paris. - Network for Greening the Financial System. 2020a. Climate Change and Monetary Policy Initial Takeaways NGFS, Paris. - Network for Greening the Financial System. 2020b. Macroeconomic and Financial Stability Impacts of Climate Change Research Priorities. NGFS, Paris. - Network for Greening the Financial System. 2020c. Progress Report on the Implementation of Sustainable and Responsible Investment Practices in Central Banks’ Portfolio Management. NGFS. Paris. - Network for Greening the Financial System. 2021. Climate-related litigation: Raising Awareness About a Growing Source of Risk. Paris, France. - Network for Greening the Financial System. 2023. Climate-related litigation: recent trends and developments. Paris, France. - UNFCCC. 2020. Just Transition of the Workforce, and the Creation of Decent Work and Quality Jobs Germany. - UNFCCC. 2022a. Introduction to Migration. - UNFCC. 2022b. “What do Adaptation to Climate Change and Climate Resilience Mean?” - Academic and policy research papers: - Lönnberg, A., Jacomé, L. 2010. “Implementing official dollarization” IMF Working Paper WP/10/106. International Monetary Fund. Washington DC. - Mackenzie, G.A., and Peter, S. 1996. “Quasi-fiscal Operations of Public Financial Institutions”. IMF Occasional Paper 142. International Monetary Fund. Washington, DC: - Schoenmaker, D. 2019. “Greening Monetary Policy.” Breugel Working Paper, Issue 02. Brussels. - Shakir, T., and Tong M., 2014. “The Interaction of the FPC and the MPC.” Bank of England Quarterly Bulletin 2014 Q4. - Skinner, C. P. 2021. “Central Banks and Climate Change.” Vanderbilt Law Review Vol. 74:5:1301. Tennessee. - Skidelsky, R. 2021. “Should Central Banks have a Green Mandate?”. Project Syndicate. - Tucker, P. 2018. “Pristine and Parsimonious Policy: Can Central Banks Ever Get Back to it and Why They Should Try.” The Changing Fortunes of Central Banking, Cambridge University Press. - Setzer J. and Higham C. 2023. “Global Trends in Climate Change Litigation: 2023 Snapshot” Grantham Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy, London School of Economics and Political Science. - Linklaters. 2021. “ECB’s quantitative easing programme challenged before Belgian Courts for “fuelling the climate crisis”. - Linklaters. 2022. “Does the ECB’s quantitative easing programme fuel climate change? NGO ClientEarth goes back to court after the dismissal of its claims”. - Skinner, C. P. 2021. “Central Banks and Climate Change.” Vanderbilt Law Review Vol. 74:5:1301. Tennessee. - Issing O., 2019. “The Problem With “Green” Monetary Policy”. Project Syndicate. - Skidelsky, R. 2021. “Should Central Banks have a Green Mandate?”. Project Syndicate. - Kganyago, L. 2019. Public Lecture at University of Pretoria [Speech transcript]. South African Reserve Bank. Pretoria, South Africa. ### Thematic coverage reflected by the references - Legal challenges and court judgements related to central bank climate actions: - Examples include Judgement of 11 December 2018, Weiss and others, C-493/17, ECLI:EU:C:2018:1000 and Judgement of 16 June 2015, Gauweiler and others, C-62/14, ECLI:EU:C:2015:400. - Litigation and trends: Network for Greening the Financial System. 2021; Network for Greening the Financial System. 2023; Setzer J. and Higham C. 2023. - Central bank policy statements and strategy documents on climate and sustainability: - Sveriges Riksbank sustainability strategy and bond purchase disclosures; Bank of Japan Statement on Monetary Policy; People’s Bank of China Carbon Emission Reduction Facility press release. - Financial stability, macroeconomic impacts, and portfolio management: - Reserve Bank of Australia Financial Stability Review (2019) Box C; NGFS reports on macroeconomic and financial stability impacts; NGFS progress reports on sustainable and responsible investment practices. - Monetary policy design and debates over mandates: - Contributions by Issing O. 2019; Schoenmaker, D. 2019; Tucker, P. 2018; Skidelsky, R. 2021; Schnabel, I. 2021. - Operational responses and instruments: - The People’s Bank of China carbon facility; discussions of quantitative easing and bond purchases (Linklaters 2021, 2022; Sveriges Riksbank 2022). ### Geographic and institutional coverage - International Monetary Fund (IMF), Network for Greening the Financial System (NGFS), United Nations Framework Convention on Climate Change (UNFCCC), central banks and financial authorities from: - European Central Bank (ECB) - Bank of Japan - Sveriges Riksbank - Reserve Bank of Australia - Reserve Bank of New Zealand - South African Reserve Bank - People’s Bank of China - Deutsche Bundesbank - Bank for International Settlements (via statements) - Monetary Authority of Singapore ### Observations on the nature of evidence - The reference list includes primary legal sources (EU judgements), central bank published strategies and press releases, NGFS thematic reports, academic working papers and law review articles, and practitioner commentary (Project Syndicate, Linklaters). - Several entries focus explicitly on climate-related litigation, market neutrality vs efficiency debates, and the operational implications of integrating climate considerations into central bank portfolios and policy tools. *Source: Central Banks and Climate Change: Key Legal Issues, Working Paper No. WP/2024/192* --- _Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024192-print-pdf.pdf_