Daily Management Review

IMF assesses risks of central banks becoming ESG-financing regulators


Analysts at the International Monetary Fund have identified the risks of central banks actively engaging in a green transition. In their assessment, this could lead to excessive volatility in financial markets and the emergence of ESG bubbles.

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The International Monetary Fund (IMF) has warned that central bank intervention in ESG-financing (ESG, environmental social sustainability projects) could result in reputational losses for financial regulators and cause financial market volatility and green bubbles. The fund has called for a rejection of the practice of central bankers being put in charge of the transition to a low-carbon economy without coordination with governments.

In the study, analysts conclude that the diagnostic and policy tools of central banks in ESG matters are at an early stage of development. It does not allow regulators to calculate the implications of green finance actions because of the high uncertainty of climate risks. At the same time, advocates of an early energy transition believe that central banks should redirect lending resources to green investments by limiting lending to projects that are not green enough. Regulators, they argue, should require all financial market participants to have decarbonisation plans and implement them. 

The IMF noted that such requirements may contravene financial laws and threaten to unbalance markets. In the analysts' view, central banks should in practice only ensure information transparency and a level playing field, while the financial market itself should evaluate decarbonisation projects. The IMF believes that taxonomies, i.e. classification systems for investments in environmental and sustainable development projects, should help it to do so.

source: imf.org