Supporting a Just Transition: A Roadmap for Central Banks and Financial Supervisors

LSE
December 16, 2022
Policy Launch Event

INSPIRE Sustainable Central Banking Toolbox Policy Briefing Paper 10 (PDF)
https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2022/12/INSPIRE-Sustainable-Central-Banking-Toolbox-Policy-Briefing-Paper-10.pdf

INSPIRE Central Banking Toolbox -
Policy Briefing No. 10

Transitioning the economy to a sustainable model will have significant impacts, both positive and negative, on sectors and regions around the world.

If managed well, the transition to net zero has the potential to lead to more,better jobs and reduced risks from climate change.
However, if managed poorly, assets, workers, communities, and even entire countries could be left behind. In response, government policymakers are emphasizingthe need for a 'just transition' that leaves no one behind.

This paper sets out why it is important for central banks and supervisors to actively support a just transition, proposes a three-step roadmap to achieve this goal, and explores policy options for aligning monetary policy operations and financial regulation with a just transition.

Key Messages

・A just transition is a strategy to ensure that the greening of the economy has positive social impacts on workers and communities. This is increasingly seen as a key element in achieving climate goals, particularly net zero and resilience to physical shocks.

・As a cross-cutting requirement,a just transition requires coordinated action across all areas of financial policy and practice. This includesmonetary policy and financial regulation implemented by central banks and financial supervisors.

・To date, central bank approaches to climate change have not included social considerations. However,the income and regional inequalities created by climate change, and the potential side effects of the transition to a sustainable economy, have significant strategic relevance.

・Inequality poses significant challenges for central banks and supervisors, such asfinancial stability, central bank mandates (e.g., growth), and public support for central bank independence.

・Job creation is at the heart of central bank policy, and a just transition requirescreating high-quality jobs in environmentally sustainable economic activities to replace those lost in stranded sectors.

Recommendations

The authorspresent a roadmap for central banks and financial supervisors to support a just transition, and outline three parallel steps.

Assess.
Central banks and supervisors need to better understand and assess the distributional impacts of climate change and decarbonization. This requires incorporating socio-economic impacts into modeling toolkits, forecasts, regular economic surveillance, and research.

Advise.
While governments have primary responsibility for setting policy and financial frameworks to accelerate a just transition, central banks should not be passive actors and can play many supportive roles.

Act.
Central banks and supervisors can directly support a just transition through monetary policy operations and financial regulation. For example, they can prioritize employment objectives during the transition period and incorporate just transition principles into supervisory expectations.

To facilitate the scaling up of capital investment needed for this decade and beyond,there is a need to foresee the social impacts of decarbonization at an early stage. This requires central banks and supervisors to rapidly build capacity on these issues and place a just transition at the top of their agenda.

About the Authors

● Pierre Monnin
Visiting Fellow (Practitioner)

● Nick Robins
Professor in Practice (Sustainable Finance)

Related Articles

1 [Climate Change and Finance - Lecture at the Japan Society of Monetary Economics (Masayoshi Amamiya, Deputy Governor of the Bank of Japan, November 27, 2022)]
https://www.boj.or.jp/about/press/koen_2022/data/ko221127a.pdf

Introduction
I am Amamiya from the Bank of Japan. Thank you for the opportunity to speak at the Japan Society of Monetary Economics today.
Today, I would like to talk about climate change and finance. Addressing climate change has become one of the most important policy issues both internationally and domestically. In corporate activities, responding to ESG (Environmental, Social, and Governance) factors, including climate change, is a key management issue. In finance as well, responses to climate change are progressing. There is a growing movement to consider whether investment and lending by financial institutions contribute to climate change mitigation. In addition to shareholders, a wide range of stakeholders, including non-profit organizations, are also demanding that financial institutions consider climate-related matters.
In recent years, the connection between climate change and finance has been strengthening in both policy and practice.In my lecture today, I would like to first organize the basic issues regarding climate change and finance, and then explain the initiatives of private financial institutions and central banks around the world, including the Bank of Japan.
Finally, with the hope of making a request to all researchers, I would like todiscuss the challenges in financial and economic analysis.

2 [Overview of Transition Finance] Ministry of Economy, Trade and Industry

A "decarbonized society" is a future vision that must be pursued on a global scale, and it requires a significant supply of funds (finance).

• In Japan as well, toward the realization of 2050 carbon neutrality and a decarbonized society, in addition to efforts for businesses that are already at a decarbonized level (green) such as renewable energy, it is important to provide finance for efforts toward a steady transition to decarbonization, including energy conservation and fuel conversion, centered on industries that emit large amounts of greenhouse gases (GHG). This is because it is not possible for all countries, regions, and industries to achieve decarbonization in one leap, both in terms of technology and cost, and it is necessary to maximize emission reductions by introducing technologies that are in the transition stage.

• Transition finance is a new financing method aimed at supporting companies that are making steady efforts to reduce GHG emissions in accordance with long-term strategies toward the realization of a decarbonized society.

Reference Articles

1 [Transition Finance Tokyo's Challenge 23-02-02]

To realize a decarbonized society, the expansion of transition finance is essential. Against the backdrop of the situation in Ukraine and the deepening of supply constraints, as global strategies for responding to climate change are being reviewed, the importance of transition is increasing further. Tokyo has a role as an

international financial center in Asia where manufacturing industries are concentrated, and it is expected to play a role as a bridge to the West while sharing understanding with Asia in terms of transition finance. In this forum, we will consider future prospects and issues that both the public and private sectors should address
. While adding perspectives derived from issues such as the development of supply chain finance and the application of digital financial technology, we will invite leaders who play leading roles in policy and practice from both Japan and overseas to hold discussions.

2 [Tokyo International Financial Organization]