The direct economic impact of extreme weather events (floods, fires) on bank balance sheets and insurance sectors.

Central Banking: Theory and Practice in the Era of Sustainability

The traditional mandate of a central bank—maintaining price stability and, in some cases, supporting full employment—is undergoing its most significant evolution since the shift to inflation targeting in the 1990s. As the global economy faces the systemic threats of climate change and environmental degradation, the theory and practice of central banking are being redefined to incorporate . 1. The Theoretical Shift: From "Neutrality" to "Prudence"

However, the emergence of has challenged this stance. Economists now argue that ignoring carbon intensity is not being neutral; it is a failure to account for risk. Theory has expanded to include two primary categories of risk:

The risk that sudden policy shifts or technological breakthroughs will lead to "stranded assets"—investments in fossil fuels that lose value overnight. 2. Practice: Greening the Monetary Policy Toolkit

The frontier of sustainable central banking is moving toward . While carbon has been the focus, there is growing realization that the loss of biodiversity and ecosystem services (like pollination or clean water) poses a similar systemic risk to the global food supply and pharmaceutical industries.

The transition is not without controversy. Critics argue that by pursuing sustainability goals, central banks are engaging in The concern is that if central banks take on tasks traditionally reserved for elected governments (like industrial policy), they may lose their political independence. Proponents, however, argue that if the planet’s climate is unstable, financial stability is impossible to achieve—making sustainability a core part of their existing mandate. 5. The Future: Biodiversity and Beyond

Historically, central banking theory was built on the principle of . The idea was that central banks should not pick "winners and losers" when conducting open-market operations or setting collateral frameworks.