FRB Reviews How Central Banks Talk About Climate Change
Commentary by Steven Lofchie
In a research paper, Federal Reserve Board staff ("FRB") reviewed communication on climate change by central bankers.
FRB concluded that (i) the volume of communication on the subject has increased sharply; (ii) the breadth of topics addressed is wide ("ranging from the impact of climate change on the economy to financial innovation, sustainable finance, monetary policy, and the central bank mandate among other topics"); and (iii) central bank communications tend to use "speculative language."
FRB reasoned that while central bank communication regarding climate change increased in recent years, central banks tend to use more uncertain language regarding climate change compared to other topics, noting that the credibility of the message may suffer when there is a clear degree of expressed uncertainty. Acknowledging that climate change is a complex topic that falls outside of the traditional area of expertise for central banks, and that there is little to no information about the relationship between climate change and financial stability, FRB asserted that by making their language about climate change more confident, central banks can establish their responsiveness to the issue.
FRB encouraged central banks to improve the tone of their communications as to climate-related risk, which FRB found may be just as important as the substance of the communications.
Commentary
The research paper asks, "How can [central banks] establish credibility for being responsive to climate change when relatively little is known about how it interacts with the real and financial economy?" According to the paper, the answer to this question is that central banks should use "sharper communication with more precise language."
There is an alternative approach to the question posed in the paper; i.e., that the banking regulators should continue to use extremely uncertain language in regard to climate change because "little is known about how [climate change] interact[s] with the real and financial economy." That is, perhaps trust in government would be advanced if the regulators did not project a level of confidence that is inconsistent with our level of understanding.