The effects of climate change are more frequent, cause a considerable amount of damage, and pose risks to the economy and the financial system. Growing concerns over these risks have heightened interest in environmental issues, such as the exploitation of natural resources, pollution and biodiversity loss. These factors, along with the social and governance profiles of firms and institutions, may influence the sustainable development of the economy and the stability of the financial system. The focus that has been placed on environmental, social and governance (ESG) issues has led to the rapid spread of sustainable finance, an ecosystem where operators take into account these factors in making investment decisions.
The primary responsibility in the fight against climate change falls to governments, which can intervene to facilitate the transition towards a sustainable economic development model by introducing incentives for 'green' investments, establishing carbon pricing systems and adopting regulations to limit the activities that have the greatest environmental impact.
Why it is important for central banks
The profiles taken into account by sustainable finance, in particular those for climate change and the environment, are also relevant for central banks and for the ability to meet the institutional objectives they pursue.
There are several reasons behind central banks' growing attention to climate-related risks. Indeed, a threat to the stability of the financial system could stem from these risks. Very substantial macroeconomic effects could ensue, thus making it harder for central banks to pursue their mandate and hindering the assessment of the outlook for prices and for economic activity needed to set out their monetary policy strategies. These possible climate risks may also affect the value of the financial assets held on central banks' balance sheets and therefore their capital soundness, and, ultimately, their independence.
The analyses that central banks conduct to quantify and manage the economic risks connected with climate change and to evaluate the policies necessary to address these risks can be put at the service of the public at large. In their capacity as investors, central banks act as an example for other institutions in risk analysis and management, in the adoption of investment decisions that are consistent with the decarbonization targets, and in increasing savers' awareness.
The Bank of Italy's contribution to sustainable finance
The Bank of Italy plays an active role in sustainable finance through the various functions it performs, as an investor, monetary authority, supervisor of financial intermediaries and research institute. Its contributions include public discussion and research based on internal analyses conducted to improve understanding and to raise awareness of the importance of measuring and managing sustainability profiles when intermediaries, investors and policy makers make financial decisions. In addition, it participates in international forums such as the Network for Greening the Financial System (NGFS), established in 2017 by a number of the world's central banks and supervisory authorities to coordinate analyses, based on common objectives and lines of action, to strengthen the role of the financial system in managing climate risks and to redirect financial flows towards sustainable investment. Under Italy's G20 Presidency, the Bank of Italy promoted, together with the Ministry of Economy and Finance, the creation of the Sustainable Finance Working Group, with the objective of incentivizing best practices in sustainable finance and fostering the transition towards greener, more resilient and inclusive economies and societies.
The Bank of Italy is aware that the path set out for environmental and energy transition is a complex one and that social, environmental and governance profiles must be assessed together as they are closely interconnected. Central banks can help achieve this in order to identify policy choices that, on the one hand, minimize the negative effects on persons, intermediaries and firms and, on the other, contribute to sustainable and long-term economic growth. In this context, the transition will require a thorough revision of production models, especially for certain sectors with the highest greenhouse gas emissions. However, this does not mean that these sectors should be eliminated from the economic system, but rather that sustainable finance must carefully and efficiently allocate the financial resources needed for these sectors to complete their transition.