86 TIME November 8/November 15, 2021
CARBON
CONSCIOUS
Central banks are
getting more involved
in combatting climate
change. Here’s how
their policies can fl ow
through the broader
fi nancial system and
the economy
Central banks are evaluating their own climate risks...... and calling upon fi nancial institutions to do the same
C S G
BANKING ON
‘GREEN SWANS’
By Emily Barone
ONE FRIDAY AFTERNOON A DECADE AGO, CRISIS
struck Japan. First came a 9.1- magnitude earthquake, the
country’s largest ever recorded. That triggered a massive
tsunami, which washed away entire towns. The tsunami
then caused a meltdown at the Fukushima Daiichi nu-
clear power plant, 150 miles north of Tokyo.
Immediate human toll aside, the disasters also threat-
ened to plunge the world’s third largest economy into
crisis. Masaaki Shirakawa, then head of the Bank of
Japan, scrambled his proverbial jets. The bank doubled
its bond and asset purchases, and pumped hundreds of
billions of dollars into the market to ensure that banks
could keep lending. Working with other central banks,
it sold yen on the foreign exchange markets to stabilize
the currency. Although the disaster left 20,000 dead or
missing, Japan’s fi nancial sector withstood the shock. If
it hadn’t, Shirakawa said a month later, “the adverse ef-
fects on people’s lives and economic activity probably
would have been even greater.”
Shirakawa’s eff orts presaged a growing consen-
sus among today’s central bankers that they need to
shore up the world’s fi nancial systems against the eco-
nomic impacts of climate change. The Japan disaster
was a “black swan” event—rare, majorly disruptive and
unexpected. But rising sea levels, droughts, fi res, hurri-
canes and other extreme events from climate change—
“green swans”—are inevitable.
Armed with that foresight, eight central banks and
fi nancial supervisors came together in 2017 to come
up with a plan. Their group, the Network for Greening
the Financial System (NGFS), has grown to 98 mem-
bers, some of which are testing how regulatory poli-
cies can ready the fi nancial system for physical de-
struction of life and property, asset- value losses and
rising insurance premiums that come from green-swan
events, as well as economic speed bumps like higher
energy prices as more countries tax greenhouse -gas
emissions. “[Central banks] realize the need to do
things now to recognize the existence of risks of cli-
mate change and how they impact fi rms and people,”
says Natalia Ospina, head of policy analysis at the Lon-
don-based Sustainable Policy Institute at the Offi cial
Monetary and Financial Institutions Forum (OMFIF).
Unlike governments, central banks—which over-
see national monetary policy—can’t issue targeted
climate policies like clean-energy subsidies or car-
bon taxes. But they can tinker with banking regula-
tions to make commercial banks evaluate and hedge
Central banks are
disclosing which
parts of their
balance sheets
face climate risks
and how they will
manage those risks
Some are actively
decarbonizing their
own portfolios by,
for instance, buying
green bonds and
accepting them as
loan collateral
Central-bank
supervisors
increasingly require
commercial banks
and insurance fi rms
to disclose their
climate risks
Central banks are
running stress
tests with different
climate scenarios
to see how resilient
the fi nancial system
is to climate shocks
