Home / On Central Banks, Climate Risk, and Financialisation

30 April 2025 | Filed in GMBA | Leave a Comment

For my Leading Global Transitions course, I wrote a paper that critiqued the role that central banks play with respect to climate risk and financialisation. The following text are my thoughts, which I’ve summarised into two paragraphs. Let me know if ESG is an area that interests you, and leave a comment to discuss!

Central banks and supervisors must keep the financial system strong as climate change creates new risks and forces economies to adjust. They support the move to greener activities and the rules set by governments, because both physical risks from extreme weather and transition risks from shifting to a low‑carbon economy can damage assets, raise credit risk, and threaten financial stability. However, they also stress that this change needs joint action, more sustainable finance, and clear government policies in the real economy, since expecting the financial sector to lead the transition alone can detach it from real activity and weaken overall stability.

At the same time, central banks’ efforts are a “hit‑and‑miss” matter because they operate in markets shaped by financialisation and short‑term profit motives. Green and ESG‑labelled assets can become overvalued when investors chase them for quick gains, creating “green bubbles” that may burst and threaten stability, especially when ESG measures are loose or inconsistent. Central banks can use rules, stress tests, and disclosure demands, but they cannot fully stop speculative green investing or greenwashing without broader reforms such as stricter ESG standards, better corporate governance, and stronger public‑led green investment to make sure finance truly supports climate goals.

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