Action is needed on multiple fronts to align the financial sector with the net zero transition. Three immediate priorities include establishing a system of mandatory transition plans for multinational financial institutions, encouraging central banks to invest in ‘green’ assets, and promoting institutional cooperation outside the existing climate-specific mechanisms.
Building on the analysis in the previous chapters, this concluding chapter outlines areas demanding rapid action. It recommends principles for how central banks and financial regulators can propel the energy transition – in particular, what needs to be done to increase cross-border private investment in net zero-consistent financial products.
The principles for action cover three areas: (i) mandatory transition plans for multinational financial institutions; (ii) central banks’ management of their asset portfolios; and (iii) international cooperation beyond the climate-specific policy architecture.
Mandatory transition plans for multinational financial institutions
To ensure compliance with net zero targets, transition plans need to be made mandatory for multinational financial institutions. This will require a large number of central banks and financial regulators worldwide to establish approaches covering the entire asset portfolios of regulated financial institutions, not only the shares of such portfolios committed to net zero so far. Mandatory plans would help to ensure that financial institutions present short- and long-term climate targets, and well-defined schedules for achieving these targets across the multiple countries in which their assets are located.
Central banks and financial regulators should establish formal requirements for the credibility and comparability of transition plans. These requirements should include: (i) a science-based interim target for 2030, covering scope 3 emissions under the Greenhouse Gas Protocol; (ii) a clear schedule of the steps financial institutions must take to deliver on their plans; (iii) commitment to comprehensive coverage, in the sense that transition plans should cover participating institutions’ entire portfolios; and (iv) the establishment of benchmarks, with annual progress reports and revisions of targets based on progress.
By making the publication of transition plans mandatory, central banks and financial regulators will have a pool of comparable targets and plans to achieve them. This will make it easier to define best practice in portfolio alignment. Competition also drives action, so financial institutions globally will have a better sense of what others in their sector are doing and may feel driven to keep up with those showing more rapid progress towards net zero. Lastly, but importantly, the data from transition plans should be made openly available. This would enable statistical analysis and allow information production to inform decision-making and further policymaking.
Central bank asset purchases and portfolio management
Central banks need to lead the way on global portfolio realignment by decarbonizing their own investment portfolios. This particularly applies to their holdings of foreign exchange reserves. Ideally, in the future central banks would also develop their own net zero transition plans, which would include not only scope 1 and 2 emissions but also scope 3 emissions.
The 40 per cent of central banks whose mandates include supporting government policy priorities could add climate criteria to their reserve management processes without necessarily changing their underlying operating missions. But a bolder move would be for governments and central banks to consider explicitly integrating climate action into central bank mandates and defining the achievement of net zero compatibility as one of the purposes of reserve management.
Cooperation beyond the climate-specific international architecture
The success of the net zero transition in the global financial system, particularly of efforts to increase cross-border private capital flows to climate investment opportunities in EMDEs, will depend on international coordination to implement the various measures outlined in this paper.
The first step will be to ensure consistency across investment taxonomies. This is a minimum step, as the ideal end point would be the establishment of a single global climate investment framework. All of the specific measures that central banks and financial regulators might hope to implement – including mandatory transition plans, and adjustments to capital adequacy and collateral frameworks – depend on clear and comparable definitions within taxonomic classifications. Coordination between central banks can also allow for the identification and sharing of global best practice on net zero portfolio alignment.
The work of the NGFS will remain vital to this process, but coordination is also needed beyond the climate-specific international architecture. Climate considerations need to be integrated into broader cooperation objectives: financial, economic and development-related. The most decisive push to this process would possibly come from the G7. The establishment of a climate club, an idea first proposed by the German G7 presidency in 2022, and implemented at the end of that year, could aid the coordination of climate-related central banking and financial regulation, the development of consistent climate investment taxonomies and the establishment of mandatory transition plans for multinational financial institutions.
The FSB also has a critical role to play in continuing to set the overarching frameworks and standards for the whole financial system, much as it did by creating the TCFD in 2015. The FSB could, for example, take on the role of setting unified standards for best practice in mandatory transition plans across countries.
Although the G20 faces challenges in the context of Russia’s invasion of Ukraine, the group may still play a crucial part in the future. The G20 has already made progress, through its Sustainable Finance Working Group, on developing a transition finance framework across member countries. It should build on this existing work and promote cooperation among major developed and emerging economies whenever possible.
