Aligning financial and monetary policies with the concept of double materiality: rationales, proposals and challenges

The concept of double materiality is developing rapidly, with potential implications for monetary and financial policies. Double materiality builds on the historical accounting and auditing convention of materiality and expands it by considering that non-financial and financial corporations are not only materially vulnerable to environment-related events and risks, but also materially contribute to enabling dirty activities and environmental degradation.

Three rationales that support the use of double materiality are distinguished in this paper, each with different policy implications: i) an idiosyncratic perspective – closely connected to the concept of dynamic materiality – which considers that an entity’s environmental impacts are relevant as they provide information on the institution’s own risks; ii) a systemic risk perspective – closely connected to the concept of endogeneity of financial risks – which seeks to reduce financial institutions’ contribution to negative environmental externalities because of the systemic financial risks that could result from them; and iii) a transformative perspective seeking to reshape financial and corporate practices and values in order to make them more inclusive of different stakeholders’ interests and compatible with the actions needed for an ecological transition. Each of these rationales has potential implications for monetary and financial policies, as well as possible theoretical and practical challenges.

While the adoption of a double materiality perspective remains an open question, the concept proposes the opportunity to think more comprehensively about the role of the financial system in urgently addressing the ecological challenges of our times.


This paper is part of a toolbox designed to support central bankers and financial supervisors in calibrating monetary, prudential and other instruments in accordance with sustainability goals, as they address the ramifications of climate change and other environmental challenges. The papers have been written and peer-reviewed by leading experts from academia, think tanks and central banks and are based on cutting-edge research, drawing from best practice in central banking and supervision.

Quantifying the impact of green monetary and supervisory policies on the energy transition

15 February: To quantify the impact of “green” monetary and supervisory policies of central banks we develop a dynamic General Equilibrium Model for Sustainable Transitions (GEMST-1). This enables us to make a distinction between green and dirty final subsectors and fossil and renewable power sectors and take into account the feedback loops across sectors through energy prices until 2050. We identify four instruments (capital requirements, collateral frameworks, Asset Purchase Programmes, and Refinancing Operations) of central banks that can lower the cost of capital for climate-friendly investments and thus accelerate the energy transition and lower climate risks. We run three scenarios of different green central bank policies where the cost of capital of green final sub-sectors and/or renewable power sectors is lowered by an ambitious 100 basis points. Our analyses show that the maximum impact of such policies is achieved when it is implemented on both green final sub-sectors and renewable sub-sectors at the same time. Moreover, our study finds that green central bank policies can substantially accelerate the transition with a climate contribution that amounts to 5% -12% of the needed emission reductions under an ambitious climate action scenario. Whereas this is a substantial figure, it also indicates that green central bank policy should be seen as a compliment, not a substitute for fiscal and regulatory reports.

NGFS-GRASFI-INSPIRE exchange – The Preferential Treatment of Green Bonds

Francesco Giovanardi (University of Cologne) will present his research “The Preferential Treatment of Green Bonds”, co-authored by Matthias Kaldorf (University of Cologne), Lucas Radke (University of Cologne) and Florian Wicknig (University of Cologne).

The NGFS-GRASFI-INSPIRE exchange is designed to strengthen the connection, collaboration and research exchange between the central bankers, financial supervisors and the academic community to share and explore new and innovative research that advances the agenda on greening the financial system. New editions occur monthly and are co-organised by the NGFS Secretariat, INSPIRE and GRASFI (the NGFS’ two designated global research stakeholders). This is the 4th in a five-part series focused on the impacts and limitations of green monetary policy.  This 14th edition is hosted by the NGFS.

NGFS-GRASFI-INSPIRE exchange – Optimal Climate Change Mitigation through Green Quantitative Easing and Fiscal Policy

Raphael Abiry (Goethe University Frankfurt) will present his research “Optimal Climate Change Mitigation through Green Quantitative Easing and Fiscal Policy”, co-authored by Alexander Ludwig (Goethe University Frankfurt), Marien Ferdinandusse (European Central Bank) and Carolin Nerlich (European Central Bank).

The NGFS-GRASFI-INSPIRE exchange is designed to strengthen the connection, collaboration and research exchange between the central bankers, financial supervisors and the academic community to share and explore new and innovative research that advances the agenda on greening the financial system. New editions occur monthly and are co-organised by the NGFS Secretariat, INSPIRE and GRASFI (the NGFS’ two designated global research stakeholders). This is the 3rd in a five-part series focused on the impacts and limitations of green monetary policy. This 13th edition is hosted by INSPIRE

NGFS-GRASFI-INSPIRE exchange – Adapting central bank operations to a hotter world: Reviewing some options

Pierre-François Weber (European Central Bank) and Alessandro Calza (European Central Bank) will present their research “Adapting central bank operations to a hotter world: Reviewing some options”.

The NGFS-GRASFI-INSPIRE exchange is designed to strengthen the connection, collaboration and research exchange between the central bankers, financial supervisors and the academic community to share and explore new and innovative research that advances the agenda on greening the financial system. New editions occur monthly and are co-organised by the NGFS Secretariat, INSPIRE and GRASFI (the NGFS’ two designated global research stakeholders). This is the 1st in a five-part series focused on the impacts and limitations of green monetary policy.  This 11th edition is hosted by the NGFS.

NGFS-GRASFI-INSPIRE exchange – Green monetary policy: Implications for emissions, investment and inflation

Kai Lessmann (Potsdam Institute for Climate Impact Research) and Emanuel Moench (Frankfurt School of Finance and Management) will present their research “Green monetary policy: Implications for emissions, investment and inflation”, co-authored with Andrew McConnell (Potsdam Institute for Climate Impact Research) and Boyan Yanovski (Potsdam Institute for Climate Impact Research).

The NGFS-GRASFI-INSPIRE exchange is designed to strengthen the connection, collaboration and research exchange between the central bankers, financial supervisors and the academic community to share and explore new and innovative research that advances the agenda on greening the financial system. New editions occur monthly and are co-organised by the NGFS Secretariat, INSPIRE and GRASFI (the NGFS’ two designated global research stakeholders). This is the final session in a five-part series focused on the impacts and limitations of green monetary policy.  This 15th edition is hosted by the NGFS.

Central bank collateral as a green monetary policy instrument

14 December: Central banks can play an important role in the transition towards a climate-neutral economy. This paper discusses different green monetary policy instruments along the dimensions of feasibility of implementation and impact on the transition process. We identify the inclusion of ‘brown’ collateral haircuts into a central bank’s collateralized lending framework as the most promising conduit of green monetary policy. The impact of such interventions on the real economy is then formally explored by extending a general equilibrium transition model to include a simple banking sector with central bank lending facilities and collateral adjustments. We find that both ‘brown’ collateral haircuts and ‘green hairgrowth’ increase carbon neutral investment while decreasing carbon intensive investment and emissions. Consequently, in addition to decreasing the exposure of the central bank balance sheet to climate-related risks, climate-based collateral adjustments have the potential of increasing the political feasibility of a timely transition to a carbon neutral economy by affecting emission levels. Despite ‘green hairgrowth’ having a stronger effect on investment and emissions, ‘brown’ collateral haircuts remain the recommended policy as the former is not necessarily ‘market neutral’ and thus cannot be broadly applied across central banks.

Key policy insights

  • ‘Brown’ collateral constraints as green monetary policy is a feasible instrument that can be broadly implemented across different central bank frameworks and mandates.

  • ‘Brown’ collateral haircuts increase the financing costs and decrease the volume of carbon intensive investments.

  • ‘Green hairgrowth’ has a similar effect but is in conflict with market neutrality and, therefore, not as broadly implementable.

  • The synergy of a price instrument and ‘brown’ collateral constraints results in a significantly lower and potentially politically more feasible carbon tax.

From Covid-19 to climate change and nature loss: how can a precautionary financial policy framework coordinate monetary, prudential and fiscal policies to address long term challenges?

In the face of climate-related financial risks, the Bank of International Settlements in its ‘Green Swan’ book demonstrated the importance of coordination between green fiscal policy, prudential regulation, and monetary policy. Such coordination must be underpinned by a shift in intellectual framework to facilitate financial policymaking under unprecedented global threat situations.

Aligned with this assessment, we propose to develop the Precautionary Financial Policy (PFP) framework, to address the dual issues of policy coordination and the need for an underlying paradigm shift. The PFP framework provides the theoretical justification for more ambitious financial policy interventions, in the face of the radical uncertainty characterizing long-term and potentially irreversible risks such as those posed by climate change and massive biodiversity loss.

The project will develop the PFP framework as a new paradigm that could support greater coordination between monetary, prudential, industrial, and fiscal policies (henceforth financial-fiscal) in the face of emerging climate- and nature-related financial risks. In particular, we will examine:

  • How this approach may provide a more coherent alternative than the ‘market neutrality’ principle in facilitating such coordination, in light of the recent European Central Bank’s declarations questioning this principle, and
  • How the PFP could help to deal with the problem of differing time horizons across policy spheres, institutions, and mandates that also mitigates against policy coordination.

The research will involve analysis of historical examples since the 1930s up to and including the most recent policy responses of financial-fiscal policy coordination and expanded institutional purpose to address Covid-19. We will develop a typology of financial-fiscal policy coordination and use this to formulate concrete policy recommendations in terms of institutional setup and governance.

The impact of climate change and policies on the balance of payments and central banking in commodity-exporting developing countries

We assess the implications of climate change and policies for monetary policy mediated through their impact on the balance of payments. We examine transitional and physical risks in developing countries where the influence of balance of payments on monetary policy is shaped by the countries’ strong dependence on primary commodities, on top of their larger vulnerability to external financial shocks in comparison with developed economies.

We use two case studies of middle-income countries to conduct this research. We analyse the experience of Nigeria, an oil-dependent commodity exporter, during three sharp declines of international oil prices (the global financial crisis of 2008, the fall in oil prices in 2014, and the fall in 2020 due to the C-19 pandemic). This will serve as an example of the potential impact of transitional risks such as decarbonisation policies and divestment strategies. Regarding physical risks, we take the case of Argentina, a country with a significant share of agricultural products in its export basket. The country is experiencing more frequent and prolonged droughts and floods in main agricultural regions.

The study conducts a mixed methodology approach. The focus will be on export performance, exchange rate volatility, and the implications for monetary policy design and implementation, capturing direct (trade balance) and indirect effects (exchange rate and financial stability) of developments in commodity exports and prices. Immediate effects are assessed with the help of event studies and time series econometric analyses. These quantitative results are triangulated with qualitative data derived from semi-structured expert interviews with central bankers.

Building a macro-financial integrated-assessment model for ordered transitions and fiscal-monetary policy interactions

Assessing the impacts of climate change-related physical and transition risks on the financial system and the macroeconomy is one of the most urgent and prominent needs to support climate policy design. However, the modelling toolbox for the assessment of these risks is currently rather scant.

We contribute to filling this gap by developing a macro-financial model that brings a detailed energy sector into a macroeconomic agent-based model with heterogenous banks and cross-sectoral exposures. The advantage of the proposed framework is twofold: It builds on two consolidated models in their respective domains (macro-financial and integrated assessment modelling) and includes a representation of both micro-level indicators of economic activity (e.g., insolvency rates, mark-ups, productivity dispersion, non-performing loans) and macro-level indicators (e.g., output growth, volatility, unemployment, public debt). Crucially, the macroeconomic properties will emerge indirectly from the decentralised interactions of individual agents and will possibly show non-linear and threshold effects (e.g., due to contagion).

After calibrating the model, we structure the project around two main applications. First, the model will be used to assess how the transition pathways of major emission/socio-economic scenarios and the associated changes in the climate would affect macroeconomic fundamentals and financial stability. Our results will add a macro-financial perspective to the scenario narratives. Second, building on previous work of the project team, we are testing a variety of climate-related fiscal, monetary, and macroprudential policies, with the aim of studying whether a target to physical or transition risks from climate change could hide trade-offs or double-dividends.