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It is well known that Central Banks in different countries control the Monetary Policy and thereby, the currency exchange rates for that country and overall work towards ensuring the country’s economic well-being and prosperity. Also recently, the world’s largest central banks are joining the fight against Global Warming, which might seem far distant from their usual financial work, but there’s a strong set of reasons why they are doing so…let us read on…
Why are central banks jumping into this fight against global warming
Well, quite simply some Central Banks have received new directives from their respective Governments to get involved, whereas some others are exploring ways to join this fight under existing rules itself.
And, why not?
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Central Banks are there to grow their country’s economies and Global Warming actually poses the greatest long-term threat to the global economic prosperity, inflation and financial stability as a whole. Some of the different ways in which world’s economies are likely to be affected by Global Warming are:
- Lower farm productivity
- Rising sea-levels affecting waterfront properties
- Increased mortality
- More migration
- Higher insurance premium costs and payouts
- Who can forget the recent Dubai rains (in April 2024)
- More areas getting impacted by serious wildfires in different parts
OK, so we do understand why combating Global Warming is necessary, but how exactly can Central Banks contribute to this fight…let’s look at that now…
What can central banks do
So, coming to the moot point of what Central Banks can actually do to stem or reduce or grow awareness towards Global Warming and Climate change initiatives.
Central Banks can make a strong impact by publishing research reports and enforcing regulations on Global Warming and rules that Banks must follow. They can direct Banks to calculate and disclose their climate-related risks, and can include climate-repricing scenarios in the stress tests Banks have to prepare for covering for likely losses.
They could discourage Banks investments and lending towards polluting fossil-fuel related projects, limit exposure to so-called ‘brown industries’, and encourage alternative energy initiatives.
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You would have seen Banks giving Car Loans for electric and hybrid vehicles at preferential rates and also some Banks issuing Green Bonds or Sukuks…all of which are under the directives of Central Banks to promote climate-friendly initiatives. Some Banks have also issued credit cards that calculate your carbon-footprint or offsets and is of particular interest to customers who are more environmtally-aware.
In summary
We look forward to and encourage more such welcome moves by Banks and Central Banks on the climate-change front over the coming years to make our world a clean and green place for all of us 😊
