ECB faces legal pressure over bond purchases from polluting firms

The European Central Bank’s (ECB) climate roadmap as currently drafted is “too slow, too vague and too narrow in scope”, according to a letter sent to governor Christine Lagarde from the environmental law charity ClientEarth. The challenge comes amid an intensifying legal battle over bond purchases by European central banks from fossil fuel companies and other polluting industries.

The letter calls on the ECB to immediately stop buying bonds from companies whose activities are incompatible with the Paris agreement. It says the bank should restrict purchases from companies which fail to adopt a credible Paris-aligned transition plan by 2023.

The climate roadmap was published as part of the ECB’s landmark climate strategy in July, and lays out a series of climate-related actions that the bank plans to undertake. Although it includes a commitment to include climate considerations in the corporate bond purchase programmes, ClientEarth’s letter points out that it will have no bearing on the bank’s operations in the near term.

“It appears that no changes to the CSPP are likely to be implemented before 2023, there will be long adaptation periods to allow firms to comply with any new criteria, and the ECB’s progress will be dependent on external legislative timeframes,” Anaïs Berthier, ClientEarth’s head of EU affairs, says in the letter. “This is unacceptably slow.”

The ECB has bought bonds from a range of large companies via its corporate sector purchase programme (CSPP) and pandemic emergency purchase programme, with the latter being set up last year. Both are aimed at improving the financing conditions of euro area firms, and such programmes have been found to have a particularly beneficial effect for the companies deemed eligible to take part.

The bond-buying programmes are implemented by national central banks in the euro area. ClientEarth is currently engaged in litigation challenging the failure of the Belgian National Bank to fulfil environmental protection and human rights requirements when conducting its purchases. The charity has asked for the question to be referred to the European Court of Justice, in a move which could lead to the ECB’s programmes in their current form being deemed illegal. The case was heard by a court in Brussels last week, and a decision is expected by the end of the year.

ClientEarth’s letter contends that the ECB risks neglecting its duties under EU treaties requiring it to support the general economic policies in the bloc which include contributing to sustainable development and improving the quality of the environment.

The ECB’s roadmap includes a commitment to develop proposals for adapting the CSPP framework to include climate change considerations by mid-2022. But ClientEarth says the bank must go further by publishing an annual report on how it is aligning its entire monetary policy operations with the Paris goals and EU climate targets, starting next year.

Earlier this month, the Bank of England set out changes to its own corporate bond purchase scheme aimed at favouring greener companies and incentivising climate-friendly behaviour. Firms will have to meet certain climate governance standards for their bonds to be eligible for inclusion, with coal companies set to be excluded altogether. Future purchases will be tilted towards companies with a stronger climate record.