In the evolving landscape of global finance, central banks have increasingly turned their focus toward the multifaceted challenges posed by climate change. Beyond their traditional mandates of monetary stability and financial system oversight, these institutions are now grappling with the intricacies of climate risks—risks that arise not only from the physical impacts of a warming planet but also from the transitional upheavals as economies pivot away from fossil fuels toward cleaner energy sources. A recent comprehensive study examining central banks across both OECD countries and the G20 reveals the diverse strategies and motivations underpinning how these critical institutions manage climate-related financial risks.
At the core of this inquiry is a dataset unprecedented in scope and detail, capturing how central banks conceptualize and operationalize risk management in the context of climate change. Whereas physical climate risks encompass tangible threats like extreme weather events, sea-level rise, and prolonged droughts, transition risks involve the financial upheaval resulting from policy shifts, technological advances, and changing market preferences during the dismantling of a fossil-fuel-dependent economy. The study compellingly establishes that central banks are not monolithically approaching these challenges: their responses vary dramatically, with some aggressively “re-risking” investments associated with fossil fuels while simultaneously “de-risking” those aligned with clean energy sectors.
This nuanced behavior underscores an urgent shift in central banking ethos—from purely safeguarding systemic risk to actively engaging with climate-driven financial vulnerabilities. Fascinatingly, the research confronts a prevailing assumption: climate risk management practices within central banks do not systematically correlate with a country’s direct economic exposure to transition risks. In other words, whether a nation’s economy is heavily reliant on fossil fuel industries or vulnerable to abrupt regulatory changes does not necessarily predict how its central bank addresses climate risk.
Instead, the study highlights the paramount influence of climate politics as a determinant. Political contexts—ranging from the strength of environmental advocacy to the political will aligned with climate mitigation—appear to shape the decisiveness and nature of central banks’ climate-risk interventions. This suggests that central banks, traditionally viewed as apolitical gatekeepers of financial stability, might be more politically responsive than previously acknowledged, embedding themselves within the broader national discourse on environmental and energy policy.
Physically, climate threats have been increasingly factored into financial stability assessments. Central banks in regions prone to acute climate events are progressively adjusting their frameworks to account for climate-induced asset devaluation and credit risk deterioration. Such adjustments include stress-testing scenarios grounded in climate forecasts that challenge conventional economic modeling with high degrees of uncertainty—an advancement marking the evolution of monetary authorities as critical players in climate resilience.
Equally transformative is the manner in which central banks are recalibrating investment portfolios and collateral frameworks. By assigning differential risk weights to fossil fuel versus clean energy assets, many central banks are effectively influencing credit allocation in favor of greener industries. This indirect steering of capital flows signifies an operational pivot—central banks are not merely passive responders but proactive agents shaping the contours of the energy transition.
However, this reorientation is uneven across the surveyed countries. Divergence arises not only in ambition but also in methodology and scope, with some central banks explicitly integrating climate scenarios into macroprudential regulation, while others rely on less formal or more symbolic gestures. The degree to which climate considerations penetrate monetary policy and supervisory practices varies widely, pointing to an ongoing debate around the appropriate role of central banks vis-à-vis climate objectives.
This disparity brings into focus questions of legitimacy and independence. If central banks’ climate strategies are influenced by prevailing political climates, as the study suggests, then climate risk management becomes entangled with political agendas rather than remaining a technocratic exercise. Such politicization might bolster national decarbonization efforts in politically committed countries but may simultaneously entrench inertia where political will is lacking, highlighting a potential fissure in global climate governance.
Furthermore, the research addresses the intricacies of measurement and disclosure. Central banks frequently contend with limited data quality and standardization on climate-related financial risks, complicating efforts to quantify exposure and embed climate factors into risk assessment frameworks. Advancements in climate risk taxonomy and reporting standards remain critical for refining central banks’ capacity to monitor and mitigate these risks effectively.
Amid these challenges, international cooperation emerges as a pivotal driver. Through multilateral platforms, central banks share methodologies, develop best practices, and jointly forge initiatives to mainstream climate risk management. Such cooperation enhances institutional knowledge and harmonizes approaches, facilitating a coherent global response to the financial dimensions of climate change.
Technological innovation also plays a role in this evolving landscape. The integration of sophisticated climate models, machine learning algorithms, and big data analytics empowers central banks to project potential economic trajectories under various climate scenarios. These tools enable more granular analysis of vulnerabilities and improve the robustness of financial stress-testing.
Yet, the research signals caution. The evolving role of central banks in climate risk management does not equate to a comprehensive substitute for robust national decarbonization policies. Instead, central banks’ efforts may reinforce existing political trajectories without correcting foundational policy gaps. This dynamic implies that while central banks can catalyze and support the energy transition financially, ultimate decarbonization success hinges on broader political commitment and regulatory frameworks.
In conclusion, the comprehensive assessment of central banks’ climate risk management reveals a complex tapestry of institutional responses influenced more by political context than by pure economic exposure. This insight challenges traditional narratives of central bank independence and underscores the increasingly politicized nature of financial oversight in the era of climate change. As the climate crisis intensifies, the strategic positioning and operational choices of central banks will undoubtedly shape, for better or worse, the pathways to a sustainable global economy.
Subject of Research: How central banks manage climate and energy transition risks.
Article Title: How central banks manage climate and energy transition risks
Article References:
Shears, E., Meckling, J. & Finnegan, J.J. How central banks manage climate and energy transition risks.
Nat Energy (2025). https://doi.org/10.1038/s41560-025-01724-w
Image Credits: AI Generated
