BiGS Actionable Intelligence:
BOSTON — Central banks are emerging as unexpected climate crusaders. This reflects a recognition by the central banks of many major countries that climate change poses a significant threat to economic stability, a trend influenced as much by politics as by economics, according to a recent study from Harvard Business School’s Institute for Business in Global Society (BiGS).
This recognition comes as renewable energy's plummeting costs erode the value of coal and other high-polluting carbon-based power sources, while climate-driven disasters inflict mounting economic damage worldwide.
Notably, the U.S. Federal Reserve has been slow to follow the trend led by British, Chinese, and European central bankers, according to the new study, How central banks address climate and energy transition risks.
Climate change’s sobering price tag
Meanwhile, the increasing damage from climate change transcends location and politics. Recent wildfires in the Los Angeles area in 2025, for example, caused property and capital losses estimated between $95 billion and $164 billion, with insured losses reaching $75 billion. These figures underscore a broader trend: as global temperatures rise, extreme weather events led to nearly $1.5 trillion in losses from 2010 to 2019, the World Meteorological Organization reported in 2023.
The financial risks extend beyond immediate damages. A 2023 MIT study projects that globally, lost value in stranded assets in coal power generation could amount to between $1.3 trillion and $2.3 trillion by 2050, highlighting the long-term economic challenges of the energy transition.
Against this backdrop, some central banks are taking action, even as politicians remain the primary architects of climate policy and regulation. Worldwide, the central bank responses have been uneven. Banks that are acting tend to focus on supporting clean energy projects and on managing risks — risks related to stranded assets from the transition to clean energy and those related to losses of physical assets due to increasing natural disasters.
Political will shaping central bank action
The new study, which examined 47 countries, finds that political factors influence central banks' climate risk actions, and reveals how and where central banks differ in their response to climate risks.
Study co-author Esther Shears of the University of California, Berkeley, told The BiGS Fix that while central banks famously guard their independence, the banks’ actions around climate issues across these 47 countries are not necessarily driven by the level of associated risk.
"Where there is a political driver for taking climate action, that's also where central banks take action,” Shears said. “In other places, [central banks] don't step in to fill that vacuum.”
Re-risking and de-risking investments
Central bankers leading the way in addressing climate risk are adopting policies that address declining asset values and physical risks (re-risking) and encouraging the transition to clean energy (de-risking).
Re-risking involves embedding the risk of stranded assets and physical climate risks into risk management practices. De-risking, on the other hand, involves developing rules that make finance more accessible to clean energy investors. This dual approach is aimed at ensuring financial stability while also promoting a sustainable transition to a low-carbon economy.
The Bank of England and European Central Bank, for example, have been increasing climate risk reporting, stress tests, and green asset purchases. The People's Bank of China has programs supporting carbon-reduction projects through dedicated green financing.
Meanwhile, other nations are slower to implement similar measures. The United States, the world's largest economy and a major carbon emitter, is the most notable laggard, along with Costa Rica, Russia, South Africa, and South Korea, according to the study. The U.S. Federal Reserve further distanced itself from international climate risk management in January 2025, by leaving the Network of Central Banks and Supervisors for Greening the Financial System. Since its founding in 2017, the network has been a leading platform to engage central banks and raise public awareness on the financial risks around climate change and green finance.
The study focused on Organisation for Economic Co-operation and Development (OECD) countries, plus all other countries in the Group of Twenty (G20), an intergovernmental forum. As of 2022, these countries together constituted more than 84% of global gross domestic product and 83% of global carbon dioxide emissions, according to data cited in the study from the World Bank and the U.S. Securities and Exchange Commission.
Warnings for investors
The trend of central banks getting involved in climate action signals a growing recognition of climate change's pervasive economic impact, which has implications for investors. For example, banks with exposure to power companies and utilities could face large losses as policy and competitive conditions shift around the transition to clean energy and power plants quickly become outdated.
Study co-author Jonas Meckling, a climate fellow at BiGS, explained that a rapid shift to clean energy also could devalue oil and gas reserves, leaving the banks and investors that financed the reserves with massive losses. This potentially could destabilize the lending system.
Meckling told The BiGS Fix that investors should pay attention to the information available around stranded assets and clean energy.
"There may be an underlying risk management gap emerging,” Meckling said. “Investors should be aware of both how much information they get on stranded asset risk in a given country, and also what the monetary policies are that facilitate or don't facilitate clean energy investments."
Patchwork or mandates
In the absence of consistent mandates from central banks — or future efforts for harmonization across economies by international organizations such as the Bank for International Settlements (BIS) and the Financial Stability Board — private actors or other regulators may emerge to provide climate risk information and analysis if investors demand it, based on the value of disclosure and assessments in other parts of the world.
Financial supervisors such as the U.S. Securities and Exchange Commission and private credit rating agencies already are beginning to incorporate climate disclosure and evaluations, although politics can create pressure for or against further initiatives. Private sector efforts also face other limitations, since they lack access to the type of standardized information that some central banks are beginning to require.
"Where there is more mandated disclosure, they'll have a different information basis," Meckling said. The question remains, "How much could they substitute for this risk management function that central banks perform in some countries and the cases where they don't?"
As investors become more aware of climate-related financial risks, they are likely to seek out this information, regardless of its source. If European and Asian markets offer greater transparency about climate risks, that could further pressure at-risk industries such as mining and power, and the financial sector, to develop new models and new standards for analyzing climate risk.
The new study was published in the journal Nature Energy in February 2025. In addition to Shears and Meckling, a third co-author is Jared Finnegan of University College London.