Climate Risks, Just Transition, and Central Bank Policy for Sustainable Economic Growth
Abstract
Climate change poses major challenges to the global economy and society, requiring coordinated efforts to alleviate its impacts. Given the nature of climate change, the adoption of central bank policies offers a more holistic strategy for managing and mitigating climate risks, thereby bolstering the resilience of the financial system and the economy. This paper aims to explore the critical tasks of coping with climate risks and proposes an integrated central bank climate regulatory framework to foster sustainable economic growth, by exploring the transmission mechanisms of central bank policies to support the establishment of just transition targets. The framework delineates three essential strategies, namely: (i) data, tools, and research, (ii) regulation and supervision, and (iii) climate transition policy. This paper shows that the central bank’s climate policies to manage transition risks can navigate just transition and support the achievement of sustainable economic growth. The operationalization of these strategies extends beyond the traditional purview of central
bank activities, necessitating a collaborative and synergistic approach among regulators and industry stakeholders to guide the global economy toward sustainability.
References
Al-Eisawi, D. (2022). A design framework for novice using grounded theory methodology and coding in qualitative research: Organisational absorptive capacity and Knowledge Management. International Journal of Qualitative Methods, 21. doi: https://doi.org/10.1177/16094069221113551.
Anwar, R. S., Mohamed, M., Hamzan, S. M., Malek, N. S. A., Zain, M. H. M., Jaafar, M. H., ... & Hong, J. (2020). Report on the roles of ASEAN Central Banks in managing climate and environment-related risks. Bank Negara Malaysia. https://www.bnm.gov.my/documents/20124/914558/2020-11-17+ASEAN+Task+Force+Report_for+publication.pdf.
Aon. (2021). Weather, climate & catastrophe insight: 2020 annual report. https://www.aon.com/getmedia/53674ecf-5d58-46d4-9e0c-5aa8e0d6f9cf/20210125-if-annual-cat-report.pdf.
Aulia, M., Afiff, A. Z., Hati, S. R. H., & Gayatri, G. (2024). Consumers’ sustainable investing: A systematic literature review and research agenda. Cleaner and Responsible Consumption, 14, 100215. doi: https://doi.org/10.1016/j.clrc.2024.100215.
Birks, D. F., Fernandez,W., Levina, N., & Nasirin, S. (2013). Grounded theory method in information systems research: its nature, diversity and opportunities. European Journal of Information Systems, 22(1), 1-8. doi: https://doi.org/10.1057/ejis.2012.48.
BIS. (2022). Principles for the effective management and supervision of climate-related financial risks. Basel Committee on Banking Supervision, Bank for International Settlements. https://www.bis.org/bcbs/publ/d532.htm.
Caiazza, R., Phan, P., Lehmann, E., & Etzkowitz, H. (2021). An absorptive capacity-based systems view of Covid-19 in the small business economy. International Entrepreneurship and Management Journal, 17(3), 1419-1439. doi: https://doi.org/10.1007/s11365-021-00753-7.
Calice, P., & Demekas, D. G. (2024). Just transition: Issues for central banks and financial regulators. Policy Research Paper, 10685. World Bank. https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099400201302418524/IDU1b60fc889152fd141721bc2a18de8e26e97cd.
Canadell, J. G., Ciais, P., Dhakal, S., Dolman, H., Friedlingstein, P., Gurney, K. R., ... & Raupach, M. R. (2010). Interactions of the carbon cycle, human activity, and the climate system: A research portfolio. Current Opinion in Environmental Sustainability, 2(4), 301-311. doi: https://doi.org/10.1016/j.cosust.2010.08.003.
Carè, R., Fatima, R., & Boitan, I. A. (2024). Central banks and climate risks: Where we are and where we are going?. International Review of Economics & Finance, 92, 1200-1229. doi: https://doi.org/10.1016/j.iref.2024.01.057.
Carney, M. (2015, September 29). Breaking the tragedy of the horizon – climate change and financial stability. Speech. Bank of England. https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.
Charmaz, K. (2001). Grounded theory: Methodology and theory construction. In: N. J. Smelser, & P. B. Baltes (eds.), International encyclopedia of the social & behavioral sciences (pp. 6396-6399), Elsevier Science Ltd. doi: https://doi.org/10.1016/B0-08-043076-7/00775-0.
Charmaz, K. (2005). Grounded theory in the 21st century: Application for advancing social justice studies. In N. K. Denzin, & Y. S. Lincoln (eds.), The SAGE handbook of qualitative research (3rd ed., pp. 207-236), Sage Publications Ltd.
Charmaz, K. (2006). Constructing grounded theory: A practical guide through qualitative analysis. SAGE Publications Ltd.
Coelho, R., & Restoy, F. (2023). Macroprudential policies for addressing climate related financial risks: Challenges and trade-offs. FSI Briefs, 18. Financial Stability Institute, Bank for International Settlements. https://www.bis.org/fsi/fsibriefs18.pdf.
Creswell, J. W. (2014). Research design: Qualitative, quantitative, and mixed methods approaches (4th edition). SAGE Publications, Inc.
Dikau, S., & Ryan-Collins, J. (2017, October 27). Green central banking in emerging market and developing country economies. New Economics Foundation. https://neweconomics.org/2017/10/green-central-banking-emerging-market-developing-country-economies.
Dikau, S., & Volz, U. (2018). Central banking, climate change and green finance. ADBI Working Paper Series, 867. Asian Development Bank Institute. https://www.adb.org/publications/central-banking-climate-change-and-green-finance.
Dikau, S., & Volz, U. (2021). Central bank mandates, sustainability objectives and the promotion of green finance. Ecological Economics, 184, 107022. doi: https://doi.org/10.1016/j.ecolecon.2021.107022.
Eames, N., & Barmes, D. (2022). The green central banking scorecard: 2022 edition. Positive Money. https://positivemoney.org/publications/green-central-banking-scorecard-2022/.
Eichengreen, B. (2021, February 9). New-model central banks. Project Syndicate. https://www.project-syndicate.org/commentary/central-banks-have-tools-for-climate-change-and-inequality-by-barry-eichengreen-2021-02.
FSB. (2021, July 7). FSB roadmap for addressing climate-related financial risks. Financial Stability Board. https://www.fsb.org/2021/07/fsb-roadmap-for-addressing-climate-related-financial-risks/.
G20 SFWG. (2021). G20 sustainable finance roadmap. G20 Sustainable Finance Working Group. https://g20sfwg.org/wp-content/uploads/2021/10/G20-Sustainable-Finance-Roadmap.pdf.
G20 SFWG. (2022). 2022 G20 sustainable finance report: Sustainable finance working group. G20 Indonesia 2022. https://g20sfwg.org/wp-content/uploads/2022/10/2022-G20-Sustainable-Finance-Report-2.pdf.
GFANZ. (2022). Financial institution net-zero transition plans: fundamentals, recommendations, and guidance. Glasgow Financial Alliance for Net Zero. https://www.gfanzero.com/our-work/financial-institution-net-zero-transition-plans/.
Gibbs, G. R. (2018). Analyzing qualitative data (2nd edition). Sage Publications.
Glaser, B., & Strauss, A. (1967). The discovery of grounded theory: Strategies for qualitative research. Aldine.
Guo, J., Kubli, D., & Saner, P. (2021). The economics of climate change: No action not an option. Swiss Re Institute. https://www.swissre.com/dam/jcr:e73ee7c3-7f83-4c17-a2b8-8ef23a8d3312/swiss-re-institute-expertise-publication-economics-of-climate-change.pdf.
IFRS Foundation. (2023). IFRS S2: Climate-related disclosures. International Financial Reporting Standards. https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards-issb/english/2023/issued/part-a/issb-2023-a-ifrs-s2-climate-related-disclosures.pdf?bypass=on.
ILO, & LSE Grantham Research Institute. (2022). Just transition finance tool for banking and investing activities. International Labour Organization and LSE Grantham Research Institute for Climate Change and the Environment. https://www.ilo.org/publications/just-transition-finance-tool-banking-and-investing-activities.
International Energy Agency. (2023). World energy outlook 2023. https://www.iea.org/reports/world-energy-outlook-2023.
IPCC [Intergovernmental Panel on Climate Change]. (2022a). Climate change 2022: Impacts, adaptation and vulnerability:Working group II contribution to the sixth assessment report of the Intergovernmental Panel on Climate Change. Cambridge University Press. https://www.ipcc.ch/report/ar6/wg2/.
IPCC [Intergovernmental Panel on Climate Change]. (2022b). Climate change 2022: Mitigation of climate change: Working group III contribution to the IPCC sixth assessment report. Cambridge University Press. https://www.ipcc.ch/report/ar6/wg3/.
IPCC. (2023). Climate change 2023: Synthesis report. Contribution of working groups I, II and III to the sixth assessment report of the Intergovernmental Panel on Climate Change [Core Writing Team, H. Lee & J. Romero (eds.)]. Intergovernmental Panel on Climate Change. https://www.ipcc.ch/report/ar6/syr/downloads/report/IPCC_AR6_SYR_FullVolume.pdf.
Juhro, S. M. (2015). The role of the central bank in promoting sustainable growth: Perspectives on the implementation of flexible ITF in Indonesia. Afro Eurasian Studies, 4(1), 23-61.
Juhro, S. M. (2023). Future central banking in emerging market economies. Reference Module in Social Sciences. doi: https://doi.org/10.1016/B978-0-44-313776-1.00118-5.
Kelemen, M. L., & Rumens, N. (2008). An introduction to critical management research. SAGE Publications, Ltd.
Lamperti, F., Bosetti, V., Roventini, A., Tavoni, M., & Treibich, T. (2021). Three green financial policies to address climate risks. Journal of Financial Stability, 54, 100875. doi: https://doi.org/10.1016/j.jfs.2021.100875.
Lo, A. Y., & Cong, R. (2022). Emission reduction targets and outcomes of the clean development mechanism (2005–2020). PLOS Climate, 1(8), e0000046. doi: https://doi.org/10.1371/journal.pclm.0000046.
Ministerio de Hacienda y Crédito Público. (2022). Decreto 2442 de 2022 Ministerio de Hacienda y Crédito Público=Decree 2442 of 2022 Ministry of Finance and Public Credit. The Republic of Colombia. https://www.funcionpublica.gov.co/eva/gestornormativo/norma.php?i=199843.
Montague, C., Raiser, K., & Lee, M. (2024). Bridging the clean energy investment gap: Cost of capital in the transition to net-zero emissions. OECD Environment Working Papers, 245. OECD Publishing. doi: https://doi.org/10.1787/1ae47659-en.
NGFS. (2018). NGFS first progress report. Network for Greening the Financial System. https://www.ngfs.net/en/publications-and-statistics/publications/first-progress-report.
NGFS. (2024). Climate change, the macroeconomy and monetary policy. Network for Greening the Financial System technical document. https://www.ngfs.net/en/publications-and-statistics/publications/climate-change-macroeconomy-and-monetary-policy.
OECD. (2020). Climate policy leadership in an interconnected world: What role for border carbon adjustments?. Organisation for Economic Co-operation and Development. OECD Publishing. https://www.oecd.org/en/publications/climate-policy-leadership-in-an-interconnected-world_8008e7f4-en.html.
OECD. (2024). Development co-operation report 2024: Tackling poverty and inequalities through the green transition. OECD Publishing. doi: https://doi.org/10.1787/357b63f7-en.
OECD et al. (2022). Latin American economic outlook 2022: Towards a green and just transition. OECD/CAF/European Union [OECD Publishing]. doi: https://doi.org/10.1787/3d5554fc-en.
PBC. (2016). Guidelines for establishing the green financial system. The People’s Bank of China. www.pbc.gov.cn/english/130721/3133045/index.html.
PCAF. (2022). The global GHG accounting and reporting standard part A: Financed emissions (2nd Edition). Partnership for Carbon Accounting Financials. https://carbonaccountingfinancials.com/en/standard#a.
Pfister, C., & Valla, N. (2021). Financial stability is easier to green than monetary policy. Intereconomics, 56(3), 154-159. doi: https://doi.org/10.1007/s10272-021-0972-y.
Rishanty, A.,Wicaksono, R. P. K., Yudawinata, R., Rizkiah, S., Aquary, R., & Arfita, A. (2023). Navigating climate transition: Evaluating exposure and resilience of Indonesian banks’ portfolios across high-emitting sectors. A bottom-up analysis. Working Paper, WP/05/2023. Bank Indonesia. https://publication-bi.org/repec/idn/wpaper/WP052023.pdf.
Rishanty, A., Sambodo, M. T., Silalahi, M., & Hambali, E. (2024). Zero-waste bioenergy to lower energy transition risks in Indonesia — a circular economy practice on methane capture in biogas production from POME. BioEnergy Research, 17, 1930-1942. doi: https://doi.org/10.1007/s12155-024-10754-3.
Ritchie, H., Roser, M., & Rosado, P. (2023). CO2 and greenhouse gas emissions. Our World in Data. https://ourworldindata.org/co2-and-greenhouse-gas-emissions.
Rösch, L. B., & Epifanio, D. (2022). Just transition in 7 central and eastern European countries: What works and what does not. CEE Bankwatch Network. https://www.just-transition.info/reports/just-transition-in-7-central-and-eastern-european-countries-what-works-and-whatdoes-not/.
Saunders, M. N. K., Lewis, P., Thornhill, A., & Bristow, A. (2015). Understanding research philosophy and approaches to theory development. In: M. N. K. Saunders, P. Lewis, & A. Thornhill (eds.), Research Methods for Business Students (pp. 122-161). Pearson Education.
Selvaraju, S., & Robins, N. (2024). Negotiating the social contract for net zero: Port Talbot and a just transition for UK steel. Just Transition Finance Lab Briefing. Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science.
South China Morning Post. (2021, May 21). What is green finance, and why is it important to China’s carbon neutral goal?. https://www.scmp.com/news/china/politics/article/3128167/what-green-finance-and-why-it-important-chinas-carbon-neutral.
Strauss, A., & Corbin, J. (1998). Basics of qualitative research: Techniques and procedures for developing grounded theory (2nd edition). Sage Publications, Inc.
UNFCCC. (2015). The Paris agreement. United Nations Framework Convention on Climate Change. https://unfccc.int/sites/default/files/resource/parisagreement_publication.pdf.
UNFCCC. (2023). 2023 forum of the standing committee on finance: Financing just transitions. Standing Committee on Finance United Nations Framework Convention on Climate Change. https://unfccc.int/sites/default/files/resource/UNFCCC_SCF_2023_web.pdf.
UNFCCC. (2024a). Nationally determined contributions under the Paris Agreement. Synthesis report by the secretariat. United Nations Framework Convention on Climate Change. https://unfccc.int/documents/641792.
UNFCCC. (2024b). NDC registry. United Nations Framework Convention on Climate Change. https://unfccc.int/es/NDCREG.
UNFCCC Regional Climate Week. (2023). Introduction to article 6 accounting. United Nations Framework Convention on Climate Change. https://unfccc.int/sites/default/files/resource/eng_Day02_Session%203_Introduction%20to%20Article%206%20Accounting.pdf.
United Nations. (2024). Goal 13: Take urgent action to combat climate change and its impacts. Sustainable Development Goals. https://www.un.org/sustainabledevelopment/climate-change/.
Warjiyo, P., & Juhro, S. M. (2019). Central bank policy: Theory and practice. Emerald Publishing Ltd.
WBSCD & WRI. (2001). The greenhouse gas protocol: A corporate accounting and reporting standard.World Business Council for Sustainable Development and World Resources Institute. http://pdf.wri.org/ghg_protocol.pdf.
WEF. (2023). The global risks report 2023 (18th edition). Insight Report. World Economic Forum. https://www.weforum.org/publications/global-risks-report-2023/.
World Economic Forum. (2024, January 16). Putting people at the centre of the green transition. https://www.weforum.org/stories/2024/01/putting-people-at-the-centre-of-climate-action/.
WWF. (2020). Just Transition to climate neutrality: Doing right by the regions. World Wide Fund [WWF] Germany. https://www.wwf.de/fileadmin/fm-wwf/Publikationen-PDF/Klima/WWF-Just-Transition-to-Climate-Neutrality-neu.pdf.
Wu, Y. (2022, June 2). China’s green finance market: Policies, incentives, investment opportunities. China Briefing. https://www.china-briefing.com/news/chinas-green-finance-market-policies-incentives-investment-opportunities/.
Yin, R. K. (2014). Case study research: Design and methods (5th edition). SAGE Publications, Inc.
Zeng, Y., Wang, F., & Wu, J. (2022). The impact of green finance on urban haze pollution in China: a technological innovation perspective. Energies, 15(3), 801. doi: https://doi.org/10.3390/en15030801.
