Central Banks Urged to Lead on Green Collateral

Adoption of greener collateral frameworks and practices by central banks can accelerate the financial system’s support net zero objectives, according to the latest paper in the INSPIRE Sustainable Central Banking Toolbox policy briefing series. The inherent carbon bias of central banks’ existing collateral frameworks creates “disproportionately better financing conditions for carbon-intensive activities”, the report says. It recommends central banks adopt an ‘environmental footprint’ approach to greening their collateral frameworks as this will allow them to play “a more active role in the fight against the environmental crisis and to contribute to the reduction of systemic financial risks”. This approach will also present fewer practical challenges than alternative approaches and will not penalise companies that are exposed to physical risks. Greener collateralisation practices by central banks will stimulate collection and harmonisation of environmental data associated with financial assets, allowing the greening of collateral frameworks to move beyond the assets of non-financial corporations, the report added.

 

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