In the last two years the central banking community has embraced the issue of climate change.

That is not to say that central bankers have been converted to climate activists. That would imply a drop-everything approach to the climate issue, which is nowhere in sight. Nevertheless, to hear Christine Lagarde of the European Central Bank (ECB) telling the Green Swan conference recently that “(o)ur planet is burning” and demanding that central bankers think beyond narrow definitions of their mandate, is a sign of how far things have moved.

Central bankers are no longer strangers in the climate policy space. In light of far-reaching national commitments to achieving net zero by 2050, a wide-ranging re-examination of financial stability regulation and monetary policy tools is under way.

In the last six months, the Bank of England has had environmental sustainability and the transition to net-zero inserted into its core mandate. In its long-awaited strategic review, the ECB stressed the importance of climate. And the Bank of Japan has been authorized to make preferential loans to assist the energy transition.

Of course, the devil is in the detail, and the suspicion of greenwashing is never far away. The ECB may have opened the question of how far financial markets underprice climate risk, but it will be some time before it is clear how this will change its policy on corporate bond buying. The Bank of Japan may have a licence to promote green lending, but it is under no obligation to penalise dirty collateral.

Read the full article at Green Central Banking.