Valida Pantsulaia
Ph.D. Student, Caucasus University
Tamar Bliadze
Ph.D. Student, Caucasus University
Nino Khukhunaishvili
Ph.D. Student, Caucasus University
Abstract
Climate change and broader environmental risks have emerged as critical challenges for global financial systems. These risks, transmitted through physical damage, transition policies, and changing market dynamics, can undermine financial stability, disrupt credit provision, and affect asset valuations. Central banks, whose primary mandates are price stability and systemic robustness, are increasingly called upon to address these challenges by integrating sustainability into their frameworks.
This paper explores the evolving role of central banks in advancing sustainable finance. It examines how climate-related and environmental risks affect monetary policy transmission, financial sector soundness, and investment strategies. The analysis focuses on three main areas where central banks are responding: (i) monetary policy operations, including collateral frameworks and asset purchases; (ii) financial stability and supervision, with an emphasis on climate risk stress testing and disclosure requirements; and (iii) portfolio management and central bank operations, where many institutions are taking steps to align their investments with sustainability objectives and reduce their own carbon footprints. The study adopts a comparative approach, discussing sustainable finance practices of central banks across Europe, Asia, and other regions. It highlights the diversity of approaches shaped by institutional mandates, regulatory environments, and levels of exposure to climate risk. By examining both advanced and emerging economies, the paper identifies common trends, such as the increasing use of scenario analysis, the integration of environmental, social and governance (ESG) considerations into supervision, and the development of taxonomies and disclosure frameworks to mitigate greenwashing.
The findings suggest that while there is no one-size-fits-all model, central banks globally are moving toward greater recognition of climate and environmental risks as material financial risks. Moreover, central banks are increasingly seen not only as regulators and supervisors, but also as market participants and leaders by example. This evolving role underscores both the opportunities and the challenges of embedding sustainable finance within the mandates of central banking, particularly in balancing traditional policy goals with long-term sustainability objectives.
Keywords: Sustainable finance; Central banks,; Climate risk; financial stability; Portfolio management
JEL Classification: E52; E58; G28; Q54; Q58
DOI: 10.52244/c2025.16
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