Greening the financial system

The document argues that while governments hold primary responsibility for climate policy, central banks and financial regulators (CBFRs) should actively use their powers to 'green' the financial system. It identifies systemic risks from 'brown' assets and the 'tragedy of the horizons,' where short-term financial metrics undervalue long-term climate risks. The briefing proposes a comprehensive toolkit for CBFRs, including the creation of a 'brown taxonomy,' mandatory climate disclosures, and the adjustment of risk-weightings and collateral haircuts to penalize carbon-intensive assets and reward green ones. It also suggests reforming quantitative easing (QE) and reserve management to move away from 'market neutrality' toward a model that supports sustainable investment.

• Climate change poses a systemic risk to financial stability through physical damage to assets and the abrupt devaluation of fossil fuel-related assets, which are often undervalued by short-term banking metrics.
• The 'tragedy of the horizons' describes a situation where financial players achieve short-term benefits by creating long-term threats that are transferred to society, a risk that cannot be mitigated by diversification.
• Current 'market neutrality' principles in quantitative easing (QE) and reserve management may inadvertently support fossil-fuel intensive companies by lowering their cost of capital, contradicting government emissions targets.
• The document recommends that CBFRs establish a 'brown taxonomy' to identify assets that embody climate risks, as this is essential for accurate risk disclosure and balance sheet analysis.
• The briefing proposes adjusting risk-weightings for capital adequacy tests under Basel III's Pillar 2, using forward-looking scenario models to differentiate between green and brown assets.
• Central banks could influence lending behavior by applying 'brown penalising factors' and 'green supporting factors' to the haircuts applied to assets used as collateral.
• The People's Bank of China (PBoC) has already integrated green credit into its Macro Prudential Assessment (MPA) and accepts lower-rated green bonds and loans as collateral for its Medium-Term Lending Facility.
• The Reserve Bank of India uses priority sector lending (PSL) quotas to direct 40% of bank lending to target sectors, including a 4% balance for uses such as renewable energy.
• The Bangladesh Bank has implemented a mandatory requirement for financial institutions to allocate at least 5% of their loan portfolio to green finance.

APA

Vaze, P., Meng, A., & Giuliani, D. (2019). Greening the financial system. Climate Bonds Initiative. https://www.climatebonds.net/files/documents/publications/Greening-the-Financial-System-Tilting-the-Playing-Field-The-Role-of-Central-Banks.pdf

Chicago

Vaze, Prashant, Alan Meng, and Diletta Giuliani. Greening the financial system. Climate Bonds Initiative, 2019. https://www.climatebonds.net/files/documents/publications/Greening-the-Financial-System-Tilting-the-Playing-Field-The-Role-of-Central-Banks.pdf.

Wikipedia

{{cite report |last1=Vaze |first1=Prashant |last2=Meng |first2=Alan |last3=Giuliani |first3=Diletta |title=Greening the financial system |publisher=Climate Bonds Initiative |date=October 2019 |url=https://www.climatebonds.net/files/documents/publications/Greening-the-Financial-System-Tilting-the-Playing-Field-The-Role-of-Central-Banks.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{vaze2019greening, author = {Vaze, Prashant and Meng, Alan and Giuliani, Diletta}, title = {{Greening the financial system}}, institution = {Climate Bonds Initiative}, year = {2019}, month = oct, url = {https://www.climatebonds.net/files/documents/publications/Greening-the-Financial-System-Tilting-the-Playing-Field-The-Role-of-Central-Banks.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }