Sustainable Central Bank Balance Sheets and Operations

Should central banks favour green assets in their operations? This question has caused an intense debate in the Euro area and the UK, focussed on corporate bond portfolios purchased by the Eurosystem and the Bank of England. It has been argued that their initial purchases supported economic activity that was not consistent with the stated targets of the EU and the UK governments to hit net zero carbon emissions by 2050. Sustainability issues are not a primary objective for central banks, and their independence could be damaged by exceeding their remits. Nevertheless, the risks arising are highly relevant to their existing primary objectives. Furthermore, central banks and all other institutions must do what they can if society is to deal with the growing existential threat. That draws on their secondary objectives. We argue that: (1) Not only is it permissible for a central bank to be involved in climate mitigation activities, but existing mandates require it. (2) The expansion of central bank balance sheets gives room for more action. (3) All market operations are in scope. (4) Central bank staff do not need to make capital allocation choices between businesses. (5) There is no trade-off with monetary policy objectives.