by Pierre Monnin (CEP, LSE), Naël Shehadeh (BCC, CFD)

In October 2024, the BCC and the Bank Al-Maghrib co-organised a technical workshop on “Climate and Nature-Related Risks for Central Banks” in Rabat, Morocco. The workshop brought together experts from seven BCC partner central banks, academics, and experts from different international institutions. The objectives were to examine the economic and financial implications of climate change and environmental degradation, their consequences for central banks and supervisors’ policies, and the experiences on these issues gathered from the different represented institutions.

The discussions covered the central themes of climate change and nature degradation relevant to central banks as monetary policymakers and financial supervisors. The first day focused on the macroeconomic consequences and their implications for monetary policy. The presentations and discussions focused on the latest empirical evidence on the macroeconomic implications, at the global level and in some countries represented in the workshop. Academic studies also presented the latest technical developments in the modelling of climate change and integrate additional nature-related impacts. The second day was dedicated to climate and nature risks for financial stability and financial markets. International experts and the workshop participants shared their experience in assessing climate-related risks in the micro- and macroprudential policies and instruments to address them, as well as the financial instruments to support the greening of financial markets. The third day concentrated on monetary policy operations and central banks’ asset portfolios, with presentations from international experts and workshop participants.

The presentations and discussions highlighted that although physical and transition risks have a global dimension, they play out differently across the various regional contexts covered by the BCC. This calls for specific assessments and policies to address them and achieve macroeconomic and financial stability. In the Western Balkans, for example, economies face temperature increases of up to 4°C by 2100, posing substantial credit, market, and operational risks. Banking sector exposures to high-risk sectors like agriculture and fossil fuels necessitate enhanced risk management frameworks. Regulatory guidelines effective from July 2023 aim to integrate climate-related risks into supervisory processes. In Latin America, extreme events like the 2017 El Niño event, severely impact micro and small enterprises, particularly in agriculture and fishing in Peru. Transition risks are also non-negligible. In this context, incorporating climate risks into stress tests is crucial for identifying vulnerable institutions and mitigating potential systemic impacts. Colombia is following this route by incorporating transition risks in stress testing. Using NGFS scenarios, Colombian supervisors find that delayed climate action could significantly degrade credit quality, especially in sectors reliant on fossil fuels and hydropower, challenging financial stability. Climate-related risks also directly impact the risk profile of central banks’ balance sheets. In Morocco, the central bank accounts for this and has developed climate-risk management and responsible investing strategies, including for foreign exchange reserve portfolios.

Participants in the workshop concurred that understanding how physical and transition risks affect the economy and spread to financial markets is key for central banks, as these risks influence the two main objectives in central banks’ mandates: price and financial stability. Discussions also highlighted that, although monetary and prudential policies and instruments to address climate-related risks can be used to some extent, central banks cannot mitigate them alone. Debates also remain on how much central banks, as price and financial stability keepers, can and should promote the financing of the net-zero transition. These questions emphasise the importance of policy coordination for climate action between authorities at the national and global levels.

The exchanges emphasised the importance of incorporating climate and nature-related risks into central bank economic and financial stability assessment and reflecting them in monetary and prudential policies when warranted. Overall, participants highlighted four areas of particular importance:

• A holistic risk integration approach: climate change and nature degradation consequences for the economy and the financial system should be consistently integrated in the assessments supporting monetary and prudential policies. Both global trends and national specificities regarding physical and transition risks are relevant.
• Improving data and modelling: data infrastructure and modelling techniques are developing rapidly. Central banks and supervisors can use these developments to improve the identification and quantification of risks and impacts of climate change and nature degradation.
• International cooperation: as climate change and nature degradation are global phenomena, cross-border collaboration between central banks and supervisors can strengthen resilience through coordinated climate action. Central banks can also benefit from sharing their experience and knowledge when assessing and addressing climate and nature risks.
• Capacity building: climate change and nature degradation affect several facets of central banks’ mandates and policies. Ongoing training and knowledge exchange are essential to equipping all departments in the institution for the evolving climate risk landscape.