In a wide-ranging speech on Friday, Frank Elderson, board member of the European Central Bank (ECB), argued that “central banks and supervisors taking climate-related and environmental considerations into account should not be seen as controversial”.
Elderson, who is also co-chair of the Basel Committee’s taskforce on climate-related financial risks, discussed the consequences of climate change for both financial regulation and monetary policy. He also argued that central bankers are “climate and environmental policy takers”, in that they “need to take climate and environmental factors into account if we want to deliver on the important supervisory and monetary policy mandates that we have been given”.
To that end, Elderson noted that “ignoring the ongoing climate and environment crises as well as the transition towards a more sustainable economy is no longer compatible with sound [banking] risk management”. He reiterated, however, that supervisors cannot dictate banks’ lending policies.
The EU already has some of the most stringent climate-related financial regulations. It requires mandatory sustainability-related disclosures in the financial services sector and banks are required to integrate climate and environmental risks into risk management practices.
On the topic of price stability, Elderson argued that “central banks must take into account their exposures to climate-related and environmental risks when designing monetary policy instruments and considering the composition of their balance sheets”, as failing to adhere to a Paris Agreement-aligned framework “risks adding to macroeconomic volatility”.
Discussing the ECB’s monetary policy activities, Elderson noted the difficulty in assessing EU member states’ alignment with the Paris Agreement and argued that the central bank “could consider increasing the share of EU supranational bonds in our total bond holdings” at the expense of member states’ debt.
The ECB has already begun decarbonising the corporate holdings of its various portfolios. It has yet to begin aligning its government holdings with the Paris Agreement.
Elderson’s speech came on the same day that the ECB announced that 16 eurozone banks, or 15% of those evaluated, are failing to adequately disclose information related to their climate-related risks, as well as how they intend to address those risks. Elderson noted that “further improvements are urgently needed” while also committing to take “appropriate supervisory actions to ensure that banks comply” with their disclosure requirements.
Last year, the ECB’s climate stress tests found that the combination of higher carbon prices and extreme weather events would result in losses of over €70bn, which the central bank noted was likely to be a significant underestimate.
This page was last updated April 24, 2023
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