Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies?

Abstract While there is a growing debate among researchers and practitioners on the possible role of central banks and financial regulators in supporting a smooth transition to a low-carbon economy, the information on which macroprudential instruments could be used for reaching the " green structural change " is still quite limited. Moreover, the achievement of climate goals is still affected by the so-called "green finance gap". This paper addresses these issues by proposing a critical review of existing and novel prudential approaches to incentivizing the decarbonization of banks' balance sheets and aligning finance with sustainable growth and development objectives. The analysis carried out in the paper allows understanding of under which conditions macroprudential policy could tackle climate change and promote green lending, while also containing climate-related financial risks. Highlights • Emerging economies are active adopters of mandatory green prudential instruments. • Several policy proposals currently discussed in advanced economies are prone to destabilizing effects. • A "one-size-fits-all" approach to greening the financial system does not exist. • Most promising green instruments are related to (bank) capital management. • Negative Capital Buffers and/or buffers built during the carbon-intensive credit cycle could be favorable too. [ABSTRACT FROM AUTHOR]