Three tales of central banking and financial supervision for the ecological transition

Abstract

The academic literature and policy discussions on the role that central banks and financial supervisors (CBFS) should play in the ecological transition, almost nonexistent five years ago, have since grown at an impressive pace. This has resulted in a wide range of proposals that often generate debates and even misunderstandings, for lack of a coherent analytical framework. Against this backdrop, this article provides a comprehensive overview of the different theoretical backgrounds and worldviews that inform existing proposals, and discusses the challenges and debates they generate when assessed from other perspectives. We identify three main approaches, or three “tales” of central banking and financial supervision in the face of ecological threats: (i) one that argues that CBFS should focus on assessing the (so-called “physical” and “transition”) risks that environmental issues pose to price and/or financial stability; (ii) one that places great emphasis on the ability of CBFS to help trigger systemic change, and thereby promotes proactive actions by CBFS to steer financial markets toward greening their activity beyond a risk-based approach; (iii) one that sees CBFS transformation as necessary but part of broader institutional change that they cannot deliver on their own, thereby requiring an evolutionary perspective. Through this comprehensive literature review, this article seeks to provide a coherent framework through which future academic contributions and policy proposals can be better understood and assessed.