From Finance bros to eco-pros: A saga of the Central Bank and financial supervisory authorities (Part 1)

What do financial authorities and climate change have in common? Until recently, not much. But as the planet heats up, these financial heavyweights are starting to realize that rising temperatures could melt more than just the ice caps—it could also tank the global economy.

Can they pull it off, or will they just be awkwardly stuck at the desk watching the planet get submerged, like the musicians in Titanic? Either way, it's a glow-up you'll want to witness.

A long time ago, in a galaxy not so far away, central banks were the boring radio jockeys of the financial universe equivalent to national radio stations. They set interest rates, printed money, and generally kept the economy from crashing like a bad Windows update. But now, thanks to the plot twist that is climate change, these financial titans are donning capes and trying to save the planet.

Move over, Avengers. There's a new superhero team in town, and it's all about that green—not the Hulk kind, but the sustainable finance kind. Sustainable finance used to be the domain of 'tree-huggers' and 'hippies,' the type who would preach about reducing your carbon footprint while driving a rusty Volkswagen van.

But fast forward to 2023, and it's the high-rollers in the central banks and financial supervisory authorities (FSAs) who are preaching the gospel of green.

They have realized that if they don't step up their game, the only green left will be the kind growing on the underwater ruins of Wall Street.

The European Central Bank (ECB), under the leadership of Christine Lagarde (who, by the way, is the closest thing finance has to a real-life Wonder Woman), has been particularly vocal about its commitment to saving the planet.

They're not just talking about planting trees—nope, they're integrating climate risks into their monetary policy framework, which, in banker-speak, means they are finally waking up to the fact that a burning planet is bad for business.

ECB's climate change agenda (which includes measures that could save the Eurozone up to €300 billion annually by 2030 in climate-related damages) is about as ambitious as our younger versions promising to ourselves to ace the next semester at the end of a horrendous semester —only slightly more grounded in reality. 

But it's not just Europe. Across the pond, the Federal Reserve, that bastion of cautious monetary policy, has started talking about climate change like it's the new subprime mortgage crisis (Watch The Big Short). They're analyzing how rising sea levels could cause coastal real estate to become as valuable as the emails from a Nigerian prince in your spam folder.

In Bangladesh, where climate change is less a distant threat and more a daily reality (as I speak, we are dealing with the flood), the central bank is leading the charge with green banking policies (at least on paper) that could make even Captain Planet jealous.

This isn't a Disney movie with a guaranteed happy ending. The central banks and FSAs still have a long way to go before they can truly claim the title of eco-warriors.

Right now, they're more like Tony Stark in the first Iron Man movie—brilliant and rich but still figuring out how to use their power for good.

Central banks aren't exactly known for being ahead of the curve. Remember how long it took them to realize that subprime mortgages were a bad idea? So, it is no surprise that their foray into sustainable finance has been cautious. But with climate change turning up the heat—literally—these institutions are being forced to evolve faster than you can say quantitative easing.

Let's start with the European Central Bank (ECB) because they've been as loud as that 2024 Shahbag lady activist (yes, who screamed at the army guy) about their green credentials.

In 2022, the ECB announced that it would start factoring in climate change risks when deciding on monetary policy—a move that's about as revolutionary as Max Verstappen's plan to race for Alpine.

This means they're now assessing how climate risks could impact inflation, growth, and financial stability. For example, they're looking at how extreme weather events—like the kind that is turning Southern Europe into a desert—could disrupt supply chains and drive up prices. According to the ECB's estimates, failure to address climate change could shave off 2.5% of global GDP by 2030, with the Eurozone taking a particularly nasty hit.

That's a cool €410 billion (about $480 billion) that could evaporate faster than your salary after salary day. And it's not just GDP that's at risk—unemployment could rise by up to 1.2 percentage points if the worst climate scenarios come to pass, turning Europe's economy into something resembling the plot of 'The Day After Tomorrow.' 

Meanwhile, in the United States, the Federal Reserve has started taking baby steps toward acknowledging climate risks. In 2023, they launched a series of pilot climate scenario analyses with six of the biggest banks—JPMorgan Chase, Citigroup, Goldman Sachs, etc. This was less about saving the planet and more about making sure these financial giants don't go belly-up if the US ends up underwater.

But let's remember our motherland, Bangladesh, where the central bank has been ahead of the curve. Before you raise your brows, know this: they had been promoting green banking since 2011—back when most people thought climate change was just a plot point in a Hollywood disaster flick, shown repeatedly in Star Movies, making it one of the first developing countries to recognize the importance of sustainable finance.  Yes, Bangladesh—a country that's simultaneously a poster child for climate vulnerability and a surprising leader in sustainable finance.

……………(to be continued)

(The writer is an engineer turned finance and ESG enthusiast, trying to drink gulps from the immensely stimulating ocean of finance/economics/ESG and move to greener pastures to shift from his tedious job in the capital market. Tell him how he can do that at galibnakibrahman@gmail.com)