Central banks have become increasingly engaged in the topic of climate change. Membership at the Network of Central Banks and Supervisors for Greening the Financial System has seen a spectacular rise, early this year the ECB announced the expansion of its work on climate change while some central banks such as the Central Bank of Hungary have seen environmental sustainability added to their mandate – to name just a few examples. This evident enthusiasm is about much more than just jumping on the green bandwagon. Climate change affects the very core of central banks’ jobs: to keep prices and the financial system stable. For example, erratic weather has an impact on price volatility and companies affected by climate change may struggle to repay debts. Nonetheless, policymakers and academics are far from unanimous in their views about the precise contours of the role central banks should play. The Fed is seen as less active than many others, certainly the ECB, while the BoE reduced the intensity of its focus in response to a shift in government priorities.
But even if a central bank has a clear green mandate, it is not clear what the general public thinks about central banks taking pro-environmental steps. And while some may think this has little relevance, let the technocrats argue about the interpretation of the mandate, it does matter. It matters because trust in the central bank has been linked to the anchoredness of inflation expectations (Brouwer and de Haan, 2022). And if inflation expectations are better aligned with central bank targets, it makes the job of central banks – keeping inflation close to target – much easier. Also, trust in the central bank may help safeguard central bank independence (e.g. Berger and de Haan, 1999). More generally, the desire to understand public opinion fits in with the broader trend of placing increasing emphasis on accountability to the public (Blinder et al., 2022).
A priori there are arguments both for why green central banking steps could enhance trust in the institution and the opposite. On the one hand, at a time when in many countries the general public appears highly aware of and worried about climate change (Leiserowitz et al., 2022), public opinion may reward institutions that adopt green policies. On the other hand, a green direction may be seen to divert attention away from traditional central banking objectives (price stability and financial stability) and such concerns may be especially pronounced in a high inflationary environment. Also, some argue that a sustainability role for central banks would give yet more power to institutions that have been granted institutional independence and are thus not directly accountable to the public (Volz, 2017).
To get to the bottom of how green steps would affect trust in the central bank, we run focus group interviews and a quantitative survey on a representative sample of Hungarian adults (Baranyai et al., 2024). We apply multinomial and ordered logistic regressions.
What do we find?
Our findings suggest limited downside risk in terms of loss of trust if the central bank takes pro-environmental measures. According to most respondents (56%), their trust in the Central Bank of Hungary would not change. Those who think their level of trust would change tended to indicate a positive change (37% versus 6%). Especially low was the proportion of those who expected a large drop in trust (1%). Women, young adults, those with a university degree and respondents from the capital were comparatively more positive.
How would green measures affect your trust in the CB?
Note: Based on representative sample of 1000 Hungarian adults surveyed in Spring 2023. The chart shows overall figures and selected subsamples.
There are some arguments in favour of viewing these as lower estimates (the proportion of respondents indicating net negative changes in trust may be smaller in the future) though caveats on account of the cross-sectional nature of our data apply.
- The first argument is that the survey was carried out during a period of very high (24-25%) inflation – when inflation peaked in fact. Regression results confirm that those with at least some interest in the economy were more likely to indicate a decrease in trust in the central bank. In such a macro-economic environment, interest in the economy may be higher than in other states of the world.
- Another result suggests that individuals who worry very much about climate change or who see environmental protection as important are more likely to increase their trust in the central bank given green measures. In fact, we find that green variables are more important in explaining the variance of the change in trust than knowledge about the central bank and the economy and interest in the economy. Focus on green matters given the macro-economic context at the time of the survey, however, may have been lower (Franzen and Vogl, 2013).
- More broadly, given expected climatic changes and a growth in associated losses (IPCC, 2023), the focus on environmental protection and combating climate change may increase further.
- Survey results also show a very significant support from students for central bank green policies and an indication of increased trust if it goes green. The process of more cohorts of such students entering the adult population over time, provided opinions do not change, would also point to limited risks of decreasing support for such policies.
How applicable are our findings to other jurisdictions?
Hungary’s inflation-targeting monetary policy framework is similar to that employed in many countries. But two important concerns would be if the public’s view on climate change or the trust-building process regarding the central bank were very different to that in Hungary. Hungary is among the countries with the lowest climate change denials and also scores fairly high on climate worry (Leiserowitz et al., 2022). That said, in most countries climate concerns do appear firmly present. For some countries, including the US, scholars document a rise in the public’s understanding of climate change (Marlon et al., 2022; Capstick et al., 2014). On a forward-looking basis, therefore, our results may not be irrelevant even to some of those countries with lower levels of climate change awareness or worry today. Regarding the trust-building process, there are many similarities between Hungary and other countries as to the factors associated with trust in the central bank. Higher generalised trust (interpersonal or institutional), knowledge about the central bank and interest in economic issues are associated with higher levels of trust in the central bank.
These arguments are reinforced by the results of a recent working paper from Germany that also examined the question (Eickmeier and Petersen, 2024). As per the study, 69% of German households reported increased trust in the ECB on account of its climate actions. The proportion of those reporting a large negative impact on trust (9%), while low, is higher in Germany than in Hungary.
Key take-away
Our findings provide support for the central bank’s green programme. Even in an environment of high inflation, there is potential for some increase and limited risk of decrease in trust. For more, please read our article published in the International Review of Financial Analysis.
Baranyai Eszter
References:
Baranyai, Kolozsi, Neszveda, Lehmann, Banai (2024). The impact of the green direction in central banking on the general public’s trust: Evidence from Hungary. International Review of Financial Analysis, 103803, Preprint.
Brouwer, N., & de Haan, J. (2022). Trust in the ECB: Drivers and consequences. European Journal of Political Economy, 74, 102262.
Berger, H., & de Haan, J. (1999). A State within a State? An Event Study on the Bundesbank. Scottish Journal of Political Economy 46: 17–39.
Blinder, A. S., Ehrmann, M., De Haan, J., & Jansen, D. J. (2022). Central bank communication with the general public: Promise or false hope? NBER Working paper 30277.
Capstick, S., Whitmarsh, L., Poortinga, W., Pidgeon, N., & Upham, P. (2015). International trends in public perceptions of climate change over the past quarter century. Wiley Interdisciplinary Reviews: Climate Change, 6(1), 35-61.
Eickmeier and Petersen (2024). The ECB’s Climate Activities and Public Trust. NBER Working Paper.
Franzen, A., & Vogl, D. (2013). Two decades of measuring environmental attitudes: A comparative analysis of 33 countries. Global Environmental Change, 23, 1001–1008. Doi:10.1016/j.gloenvcha.2013.03.009
IPCC (2023). Summary for Policymakers. In: Climate Change 2023: Synthesis Report. A Report of the Intergovernmental Panel on Climate Change. Contribution of Working Groups I, II and III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, H. Lee and J. Romero (eds.)]. IPCC, Geneva, Switzerland.
Leiserowitz, A., Carman, J., Buttermore, N., Neyens, L., Rosenthal, S., Marlon, J., Schneider, J., & Mulcahy, K. (2022). International Public Opinion on Climate Change, 2022. New Haven, CT: Yale Program on Climate Change Communication and Data for Good at Meta. https://climatecommunication.yale.edu/publications/international-public-opinion-on-climate-change-2022/ Accessed July 22, 2023
Marlon, J. R., Wang, X., Bergquist, P., Howe, P. D., Leiserowitz, A., Maibach, E., Mildenberger, M., & Rosenthal, S. (2022). Change in US state-level public opinion about climate change: 2008–2020. Environmental Research Letters, 17(12). DOI:10.1088/1748-9326/aca702
Volz, U. (2017). On the role of central banks in enhancing green finance. UN Inquiry Working Paper, 17/01
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