Sustainable development: central banks taking the lead

For those still sceptical about the financial sector’s commitment to progress on sustainable development goals and to taking all possible steps to tackle climate change, 2024 has shown that central banks, financial sector regulators and supervisors are driving change, as discussed here by Marta Kuczyńska and Szymon Gębski

Historically, central banks worldwide have focused on a defined key mission: ensuring financial stability, controlling inflation and fostering economic growth. Yet, in recent years, central banks, along with global financial bodies such as the World Bank and the International Monetary Fund (IMF), have increasingly embraced a new agenda – guiding the market towards sustainability, with an explicit focus on a green economy and environmental issues. With significant demand to combat climate change, central banks have been drawn into discussions on integrating climate risk factors into their economic evaluations and mobilising mainstream finance to support the shift towards a sustainable economy. Today, these discussions have moved beyond debate.

Financial institutions in the European Union and the UK are embedding climate-related financial risk management to mitigate systemic risks from climate change. The European Central Bank incorporates climate risks into supervision through stress-testing and scenario analysis, evaluating physical and transition risks. Regulations such as the Sustainable Finance Disclosure Regulation and Corporate Sustainability Reporting Directive (CSRD) require, among other things, that companies disclose information on environmental, social and governance (ESG) impacts, risks and (or) opportunities, and on how these are addressed by those companies.

The Bank of England employs its Climate Biennial Exploratory Scenario to assess financial institutions’ resilience to climate risks, aligning with its prudential framework. Both regions prioritise regular climate risk reporting to foster a low-carbon economy​.

In contrast, US Federal Reserve chair Jerome Powell emphasises a narrower role, stating the Fed is not a “climate policy-maker”, and focuses solely on risks affecting financial stability. This highlights the difference in approaches to sustainable finance taken by central banks in different jurisdictions. Central banks are in a unique position to enact policies to supervise and enforce the green transition of regulated participants in the financial sector. To this end, several central banks currently incorporate climate-related risks into their risk frameworks.

This shift has fuelled a number of important initiatives, chief among which is the Network for Greening the Financial System (NGFS) – an international forum for central banks and financial supervisors. Now, more than 100 central banks are collaborating under the NGFS umbrella to exchange best practices for strengthening climate risk management, promoting green finance and fostering a globally co-ordinated approach to building a sustainable, resilient financial system.

Regulatory reforms to help progress and mitigate risks

Throughout this year, there have been a number of meetings. Notably, the G20 Sustainable Finance Working Group emphasised the development of transition plans for financial institutions and corporates, helping them align with net-zero emissions goals and integrate sustainability into their financial strategies. These transition plans are designed to manage climate-related risks and tap into green opportunities, while ensuring social equity by addressing the potential negative impact of these transitions.

At the G20 meetings, finance ministers and central bank governors emphasised their commitment towards the three priorities set out by the Brazilian presidency. These are: social inclusion, and the fight against hunger and poverty; energy transitions and sustainable development; and the reform of global governance institutions. Central banks, in particular, are playing a pivotal role in these efforts by steering the financial sector towards sustainability.

To advance on these three priorities, central banks need to adequately reform their regulatory and supervisory frameworks, issue clear guidelines for the financial sector and collect the data necessary to monitor progress and the risks.

In their strategies, regional and national regulators draw on global standards and principles, such as those issued by the Basel Committee on Banking Supervision. In 2024, the Basel Committee incorporated climate risks into its core principles, recognising that these can impact not only individual banks’ soundness but also the broader banking system and, by extension, financial stability. The changes were approved at a gathering of more than 220 central bankers and supervisors, representing more than 90 jurisdictions.

Building on this foundation, Tobias Adrian, financial counsellor and director of the monetary and capital markets department at the IMF, emphasised the importance of supervisory action: “Supervisors should ensure that climate-related risks are thoroughly analysed and integrated into their supervisory processes.” Physical risks, such as increasingly frequent and severe natural hazards, or the risks associated with stranded assets during the transition to a low-carbon economy, must be “incorporated into risk assessments and prudential frameworks to ensure financial institutions are well-equipped to withstand climate-related shocks”.

Some regional and national supervisors have already adopted climate risks into their regulatory frameworks for the banking sector. For instance, the European Banking Authority (EBA) has updated its capital requirement framework, and banks must cover environmental and social risks in their reserves.

In July 2024, the United Nations Environment Programme Finance Initiative (UNEP FI) made significant contributions to the discussions, advocating for improved transparency in corporate and financial sector disclosures regarding biodiversity and the social impacts of green transitions.

Climate-related risks and green assets incorporated in financial stability supervision

The EBA’s Pillar 3 disclosures encourage banks to integrate climate-related risks into capital requirements and financial stability analysis, addressing the systemic threats that climate risks pose to the banking sector:

• Pillar 3 focuses on transparency through disclosure of ESG risks, including exposures to high-carbon sectors, physical asset locations vulnerable to climate risks, as well as mitigating actions, including metrics such as the green asset ratio and sustainable product offerings
• Pillar 2 emphasises governance, requiring effective ESG risk management and supervision strategies
• Pillar 1 covers capital requirements for exposures with ESG-related risks, ensuring that institutions hold sufficient capital against these risks.

The initiative includes the standardisation of data and collection of disclosures and prudential reporting from the banking sector.

Standards and interoperability: to make it work, make it practical

Along with climate change risk supervision, central banks and financial sector regulators are also taking the lead in encouraging or enforcing sustainable, green finance. Still, the link between economic growth and sustainable finance cannot be fully understood if there is no prior agreement on the criteria of what constitutes sustainable finance. This definition must be clear, harmonised and accepted by all. We should understand the benefits and challenges of implementing sustainable finance to analyse the impacts of green finance on gross domestic product.

In this context, central banks and financial regulators are also increasingly focused on developing a cohesive climate information architecture to standardise data reporting and support sustainable finance. This aligns with recommendations from the IMF, the World Bank and the Organisation for Economic Co-operation and Development (OECD), which highlight the need for comprehensive sustainable activities. Such frameworks can streamline reliable climate-related data, making it accessible and comparable for financial institutions assessing climate risks, making investment decisions and aligning with national climate objectives.

The IMF’s recent report underscores that well-developed taxonomies and data structures are essential for fostering transparency, as they enable consistent disclosure practices and climate risk assessments that align with international standards.

To achieve these goals, initiatives led by organisations such as the International Sustainability Standards Board (ISSB), the NGFS and the Financial Stability Board (FSB) are advocating for and encouraging standards to harmonise global climate data reporting and sustainable finance and activity definitions. By promoting the adoption of international standards, central banks are working to bridge data gaps and align sustainable finance practices worldwide.

Only with standardised, comparable and well-understood data is it possible to assess risks, and measure commitment and progress on a global scale. Similarly to how the International Financial Reporting Standards (IFRS) brought global comparability and trust for financial statements, the sustainability and ESG reporting standards are now seen as game-changing for economies to demonstrate their progress to the international community, investors and consumers in a trusted and recognisable way.

Some of the world’s fastest-growing economies have been vocal on climate change and emphasise the importance of standards. The governor of the Central Bank of Nigeria said Nigeria’s adoption of IFRS has become a cornerstone of its financial modernisation, fuelling trust among global investors and facilitating cross-border capital flow. As Nigeria positions itself for the upcoming two IFRS Sustainability Standards – IFRS S1 and IFRS S2 – focused on sustainability and climate reporting, it is setting the stage for a transformative leap. These standards are expected to empower Nigerian institutions to showcase their ESG commitments worldwide, enhancing their appeal to sustainability-driven investors, and reinforcing Nigeria’s stature as a fast-growing, transparent and investment-ready economy.

South Africa’s proactive use of IFRS is setting a benchmark in digital transparency across African markets. The IFRS Sustainability Disclosure Taxonomy – a framework designed to mark-up and structure sustainability data – allows South African issuers to report this type of data digitally and comparably, meeting investor demands for clarity and reliability. By integrating IFRS into its financial and sustainability reporting, the country has positioned itself as a leader in robust, comparable data disclosure, winning favour among ESG-conscious global investors.

Open data standards play an essential role in this success, acting as enablers of digital reporting. In 2018, South Africa pioneered digital reporting by implementing the eXtensible Business Reporting Language (XBRL), which made efficient, standardised financial disclosures a reality. Building on this foundation, the country continues to expand digital transparency by incorporating sustainability reporting into its XBRL framework to meet the rising global demand for clear, comparable ESG data.

“Through XBRL-based digital financial reporting, the Companies and Intellectual Property Commission [CIPC] is promoting transparency and sustainability in African markets,” says Rory Voller, commissioner at the CIPC. “Now, by aligning with global IFRS standards and embedding ESG principles, we are not only enhancing data accuracy but actively supporting South Africa’s sustainability goals. This commitment positions our markets as a trusted, responsible choice for international investors who prioritise sustainable growth.”  

ESG data talks, financial regulators translate it … if it is defined well

Central banks are well positioned to lead the standardisation, automation and analysis of ESG data, and enforce its use in disclosures by the financial sector to fight greenwashing and mitigate climate change risks that can threaten economic stability.

Taking such a role, central banks can address the multiplicity of standards that are already in use. Interoperability and alignment between standards – such as IFRS S1 and IFRS S2, Global Reporting Initiative (GRI) guidelines, Principles for Responsible Banking (PRB), the Task Force on Climate-Related Financial Disclosures and the European Sustainability Reporting Standards (ESRS) – are crucial and already called for by the industry.

Across various standards and reporting principles, it is possible to reach interoperability and alignment. Initiatives such as UNEP FI found alignment between the PRB and the new regulation banks in Europe would need to comply with, the CSRD. Some standard setters have provided guidance on the interoperability of their standards, such as the interoperability index between ESRS and GRI standards. or ESRS-ISSB Standards Interoperability Guidance.

For banks navigating multiple reporting frameworks, keeping up to date and being able to easily tap into the guidance and reporting taxonomies from central banks is key.

Data standardisation is the cornerstone of effective ESG data collection, analytics and market transparency

Central banks and reporting banks still face the challenges of effective ESG data management. Highlighting several challenges, first, there is a general scarcity of reliable data available to central banks, compounded by limited access to comprehensive databases and their own legacy systems that do not cater for ESG data.

Central banks also struggle with confidentiality issues, high data collection costs and limitations in IT infrastructure, which can impede the efficient management of sustainable finance databases. Effective co-ordination among stakeholders – such as regulatory bodies, financial institutions and data providers – is often lacking, further complicating efforts to compile consistent and comparable data. In addition, central banks can play a key role in streamlining approaches to data standardisation, its reusability and (or) aggregation. This might be achieved through the selection of data to be reported on for supervisory purposes and its collection, or that is already reported or disclosed under different sustainability frameworks. In mandating the submission of sustainability data for supervisory purposes, central banks can play a role in streamlining data flows.

Private firms require clarity on regulatory expectations to adequately incorporate climate-related risks and ESG factors into their risk management practices. This is essential not only for assessing their environmental impact – such as emissions, carbon footprints and green investments – but also for evaluating the credit quality of financial instruments such as collateralised claims.

Conclusions

Central banks have transitioned from passive observers to proactive leaders in sustainable finance, recognising that climate risks can threaten financial stability on a global scale. Now they can further contribute in three main ways: first, by closing climate-related data gaps through data standardisation and strengthening the information value of climate-related and sustainable finance disclosures; second, by incorporating the reporting of climate risks into the supervisory processes; and third, by enhancing their capacity to conduct climate risk analyses and promote sustainable finance.

To take and keep the lead, central banks must collaborate with the industry, key standard-setters, international agencies and the professional community, and inform their actions through dialogue with industry stakeholders, peers and experts. The work has already begun on adopting internationally recognised standards, fit-for-purpose digital reporting taxonomies and a common understanding of ESG data.

Bridging data gaps for supervisory reporting and financial disclosure is a prerequisite for the effective supervision of climate-related financial risks. Earlier this year, the ISSB issued international standards on climate-related disclosure. However, supervisory reporting must be tailored to each jurisdiction, depending on specific risk profiles and supervisory needs.

Some jurisdictions are already prepared for the next step, which is the digitisation of sustainability data reporting, similar to the way financial data reporting is digitised. Examples include jurisdictions within the EU and South Africa.

“The digital exchange of sustainability-related information opens up immense opportunities, but also underscores the need for global co-operation – even in digitally advanced jurisdictions,” says Michal Zubrycki, data standardisation expert at BR-AG. “Our collaboration with the XBRL community, along with support from the IFRS Foundation and ISSB, was instrumental in implementing IFRS S1 and IFRS S2 in South Africa, fostering a shared framework that benefits all participants. Such international support and collaboration have been essential for CIPC and South Africa to progress in ESG transparency. The next step will be building local capacity and expertise to sustain this momentum.” 

This international collaboration underscores a powerful truth in practice: only by uniting central banks, industry leaders, standard-setters, the supervised market and the technology and data communities can we bridge data gaps, elevate sustainability transparency and support the transition to a green economy. Together, these efforts build resilience to meet climate-related financial risks head-on, shaping a financial ecosystem aligned with sustainable growth objectives.
 

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