Central Banks and Climate Change

Why central banks have started paying attention to climate risks, what tools they use, and the debate over how far their role should extend.

Climate change was once seen as outside central banks’ concerns. Over the past decade, many central banks have started treating it as relevant to their core responsibilities.

Why central banks care

Financial stability: banks and insurers exposed to climate-related losses, from floods to stranded fossil fuel assets, could face problems that threaten the financial system.
Price stability: climate events can cause supply shocks, raising food and energy prices.
Economic forecasting: climate change affects growth and productivity.

In a 2015 speech, then Bank of England Governor Mark Carney described the “tragedy of the horizon”: climate risks fall beyond the typical time horizons of businesses, politicians and regulators, so they are neglected.

What central banks do

Climate stress tests: testing whether banks could withstand climate-related losses under different scenarios. The Bank of England and European Central Bank have run such exercises.
Disclosure requirements for climate risks.
Research and scenarios: the Network for Greening the Financial System, founded in 2017, develops common climate scenarios and now includes over a hundred central banks and supervisors, including the Reserve Bank of India.
Portfolio choices: some central banks have adjusted their own investments or collateral rules to account for climate risk.

The debate

Supporters argue climate risks are real financial risks that central banks must manage.
Critics argue central banks should stay within narrow mandates and leave climate policy to elected governments, warning that climate activism could threaten central bank independence.

In the United States, the Federal Reserve withdrew from the Network for Greening the Financial System in 2025.

A bank's flood exposure

A bank has lent heavily to homeowners and businesses in a low-lying coastal region. A climate stress test models what happens if severe floods become more common: property values fall, borrowers default and insurance becomes unavailable. The test shows the bank could face large losses, prompting it to hold more capital or diversify its lending.

Thinking central banks set climate policy

Central banks do not set emissions targets or carbon taxes; those are decisions for governments. Central banks focus on how climate risks affect financial stability and inflation.

Key takeaways

Many central banks now treat climate change as a financial and economic risk.
Mark Carney described the tragedy of the horizon in 2015.
Tools include climate stress tests, disclosure and shared scenarios through the NGFS.
Critics argue central banks should avoid climate policy; the Fed left the NGFS in 2025.