Shifting Gears: Integrating Climate Risks in Monetary Policy Operations

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The assets central banks purchase and accept as collateral are at the core of monetary policy implementation. Risk considerations play a crucial role in the selection of these assets: central banks seek to limit their holdings and eligible collateral to assets that minimize their risk exposure. Yet, the risk metrics they rely on do not sufficiently reflect climate financial risks. While central banks recognize this shortfall, they have been slow in addressing it. This note proposes four steps for them to shift gears.