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By Natalie Brooks•Last Updated August 25, 2025

How Green Monetary Policy Shapes Sustainable Finance and the Economy

Photo by omid armin on Unsplash

Introduction: The Rise of Green Monetary Policy

Global financial systems are undergoing a transformation as central banks confront the economic risks of climate change. Traditional monetary policy tools, designed to manage inflation and support economic stability, are being adapted to address environmental challenges. This new approach, known as green monetary policy , aims to incorporate climate considerations into the core mandates of central banks, influencing both credit allocation and market signals toward sustainability [1] .

What is Green Monetary Policy?

Green monetary policy refers to the deliberate use of central bank tools-such as lending facilities, asset purchase programs, and collateral frameworks-to steer financial markets and capital flows toward environmentally sustainable activities. This can involve:

Setting emissions reduction targets within monetary frameworks
Prioritizing green credit flows through selective lending and favorable terms
Adjusting collateral requirements to favor low-carbon assets
Tilting asset purchases toward green bonds or sustainable investments

These strategies aim to close the “green investment gap,” where the demand for sustainable investment far exceeds current supply, and to manage emerging climate-related financial risks [1] .

How Central Banks Implement Green Monetary Policy

Central banks have several actionable tools to influence the green transition:

1. Green Credit Controls and Lending Facilities

Selective green credit controls involve offering preferential lending terms to financial institutions that channel funds into sustainable projects. For example, the People’s Bank of China (PBoC) broadened the scope of assets eligible as collateral in its lending facilities to include green bonds, giving them priority status. This not only reduced borrowing costs for green projects but also sent a strong market signal about the value of sustainability [3] .

To engage with these opportunities, banks and businesses can:

Consult their central bank’s public documentation on eligible collateral and green lending programs
Apply for green bonds or sustainability-linked loans through established financial channels
Monitor regulatory announcements for updates on green credit policies

As implementation varies by country, contact your national central bank or major commercial bank to learn about available green lending facilities.

2. Green Asset Purchases and Collateral Policies

Central banks can influence the market by adjusting the criteria for their asset purchases. They may:

Exclude carbon-intensive assets from purchase programs (negative screening)
Prioritize or “tilt” purchases toward green securities (positive screening)
Require higher proportions of green collateral from counterparties

For instance, the European Central Bank (ECB) and others have explored ways to link refinancing costs directly to green lending targets, potentially offering lower rates to institutions that finance emission-reducing projects [5] .

Banks and investors can:

Review eligibility for central bank facilities based on their green asset holdings
Adjust investment portfolios to include more green bonds, which may become eligible for favorable treatment

To determine your eligibility, reach out to your institution’s treasury department or the relevant central bank’s collateral management office.

3. Green Quantitative Tools and Market Signaling

Innovative monetary tools, such as targeted refinancing operations based on green criteria, are being piloted by some central banks. These tools support the provision of cheap credit specifically for sustainable projects and send clear signals to financial markets about the long-term value of sustainability [1] .

Businesses and investors interested in participating should:

Monitor official central bank communications and updates on green initiatives
Engage with industry associations to stay informed about evolving eligibility requirements

Real-World Examples of Green Monetary Policy in Action

China: In 2018, the PBoC included green bonds as eligible collateral for its Medium Term Lending Facility. This move incentivized banks to hold and issue green bonds, lowering their borrowing costs and supporting renewable energy and sustainable infrastructure projects [3] .

European Union: The ECB has piloted the idea of “green TLTROs,” which could offer preferential rates to banks meeting green lending targets. While not fully implemented, the proposal demonstrates how monetary policy can be tied directly to sustainability outcomes [5] .

Brazil, India, and the US: Research shows that incorporating climate goals into monetary frameworks in these countries can support emission reductions without compromising inflation control, provided policies are carefully calibrated [1] .

Benefits and Challenges of Green Monetary Policy

Benefits:

Reduces financial risks associated with climate change by promoting sustainable investments
Strengthens the resilience of financial systems to environmental shocks
Closes the green investment gap by directing capital toward low-carbon projects
Sends powerful market signals that incentivize businesses to prioritize sustainability

Challenges:

Potential trade-offs with central banks’ primary mandates, such as inflation targeting
Need for robust metrics to define and monitor “green” assets
Market liquidity concerns, as green securities can be less liquid than conventional assets
Operational complexities in adjusting existing frameworks

Many central banks are addressing these challenges by starting with their own non-monetary portfolios, such as pension or reserve funds, before scaling up green initiatives [4] .

How to Access Opportunities in Green Monetary Policy

You can engage with green monetary policy initiatives in several ways:

For Businesses and Financial Institutions: Review your central bank’s official website for policy statements and guidance on green lending or collateral eligibility. Many central banks publish frameworks and updates on sustainable finance initiatives. If in doubt, contact your bank’s regulatory affairs or treasury desk for tailored advice.
For Investors: Consider increasing allocations to green bonds and sustainability-linked assets, which may become more attractive as central banks expand their green programs. Consult reputable financial news outlets and official central bank communications for updates.
For Policymakers and Advocates: Engage with research from organizations such as the Bank for International Settlements, International Monetary Fund, or European Central Bank. These bodies offer regular publications and webinars on best practices for green monetary policy.
General Public: Stay informed by following updates from your country’s central bank or finance ministry. Search for terms like “green monetary policy,” “sustainable finance,” or “climate risk management” along with your country’s name to locate official resources and announcements.

If you are unsure where to begin, you can start by searching “[Your Country] Central Bank green finance” or contacting your national financial regulatory authority for guidance on sustainable finance programs.

Alternatives and Future Directions

As green monetary policy evolves, alternative strategies include:

Developing national or regional green taxonomies to standardize what qualifies as a green asset
Partnering with international organizations for technical assistance and capacity building
Encouraging voluntary industry standards alongside regulatory initiatives

Central banks continue to experiment and adapt, and future progress in green monetary policy will depend on collaboration among regulators, financial institutions, and the wider public.