ECB urged to overhaul climate roadmap in light of energy crisis

The European Central Bank (ECB) must increase the speed and ambition of its climate policies in light of the ongoing energy crisis, civil society groups have said. They have issued a series of recommendations as to how the central bank should align its monetary and prudential frameworks with support for the energy transition.

The recommendations – endorsed by groups including Positive Money Europe, WWF, Finance Watch and Reclaim Finance – include fully decarbonising the ECB’s collateral framework and asset purchases, favouring more climate-friendly companies in its refinancing operations, and introducing climate-adjusted capital requirements.

“The current energy crisis, which has lifted inflation to record high levels since the creation of the euro and is being exacerbated by the consequences of the Russian invasion of Ukraine, has only reinforced the urgency for the ECB to act forcefully in support of the EU’s energy transition,” said Adua Dalla Costa, a researcher at Positive Money Europe.

EU leaders have spoken about the need to move to renewables at “lightning speed”, given the immense political vulnerabilities and the mounting costs of energy bills resulting from the continent’s continued reliance on imported fossil fuels. ECB policymakers have acknowledged that they have a role in supporting this process.

In a speech last month, board member Isabel Schnabel said the central bank’s goal is to ensure that its instruments are aligned as much as possible – and as soon as possible – with the Paris objectives. But she ruled out steps such as greening the ECB’s refinancing operations, citing a lack of agreement about a common definition of which loans are green or otherwise.

In their joint statement, the civil society groups reject the idea that imperfect information or methodologies should be a barrier to immediate action. They cite comments made by Schnabel’s colleague on the ECB board, Frank Elderson, who has said that the risks of inaction on climate change are far greater than the risks of acting on partial data.

The civil society statement calls for the ECB to give its backing to a ‘one-for-one’ capital regime, which would require banks to finance lending to new fossil fuel projects using entirely their own funds. The EU is currently reviewing its capital requirements regulation and directive, including whether to further integrate climate risks into banking supervision.

No ECB official has yet expressed support for adjusting Pillar 1 capital requirements as the groups recommend. However, several policymakers have indicated recently that they expect there will be capital implications if banks fail to meet the targets set out in their climate transition plans, or that are shown to have inadequate risk management arrangements in the emergent stress testing regime.

“Banks should be required to publish transition plans to be assessed by supervisors. A misalignment with the climate policy target could be seen as an indication of material transition risk, leading potentially to a capital add-on,” said Banque de France governor and ECB governing council member François Villeroy de Galhau last month.

The ECB published a detailed climate roadmap last year, which includes measures such as incorporating climate criteria in the framework guiding the allocation of corporate bond purchases. The groups say that while the roadmap is welcome, it fails to deliver the ambition and urgency that is necessary, particularly in light of the current crisis.

A further strategy review is scheduled to take place in 2025. Dalla Costa said that the joint statement offered the ECB a way forward before this takes place.