Environmental Risk and Central-Bank Targeted Refinancing Operations

Targeted refinancing operations (TROs) have traditionally been used to improve the transmission of monetary policy, by providing incentives for banks to lend to the real economy. Through TROs, central banks provide refinancing facilities to banks at differentiated interest rates. The criteria for the differentiated rates are a promising avenue for the introduction of monetary policies that can tackle a wide range of market failures and inefficiencies, such as environmental degradation. Apart from recent exceptions, the interest rate setting of TROs is yet to reflect the materiality of nature loss resulting from current production processes across many sectors of the economy. Environmental risks and impacts pose a threat to economic, financial, and price stability. Central banks and financial supervisors can contribute to the transition to a more sustainable economy by addressing such risks and impacts. Introducing environmental considerations into TROs requires appropriate data and criteria. In addition, monitoring and certification processes should ensure that the risk of greenwashing is minimised. While no central banks have thus far introduced TROs that comprehensively tackle all important environmental issues, lessons can be learned from recently adopted measures. The Bank of Japan (BOJ) introduced a liquidity measure which aims at supporting the private sector’s efforts in combating climate change and stabilizing the macroeconomy in the long run. Additionally, the People’s Bank of China (PBC) conducts structural monetary policy to support sectors that can play a key role for carbon emission reduction