Elderson highlights gaps in climate finance

European Central Bank (ECB) executive board member Frank Elderson has emphasised the urgent need to address the climate and environmental crises. Highlighting the gaps in climate finance, Elderson called for concerted efforts from the EU to align with the Paris Agreement.

In a speech delivered at the State of the Union conference in Florence on 5 May, Elderson underlined his concern regarding the lack of climate action within the EU, warning that linear trend extrapolation indicates global warming will surpass the 1.5ºC limit by March 2035, a decade earlier than previous projections.

The European Commission has set ambitious objectives to lower carbon emissions by at least 55% by 2030 and achieve energy independence from Russian fossil fuels before then. However, Elderson pointed out that significant shortcomings in the financial system are hampering the flow of investment in green and sustainable economic development. To meet the targets set by the EU, an average annual investment of €1.25tn over the next decade is required, with most of the funding expected to come from the private sector.

The speech outlined three main gaps which need to be addressed. Firstly, carbon pricing remains inadequate, favouring high-emission activities. While progress has been made, Elderson called for a comprehensive approach to properly price emissions and ensure a level playing field for economic activity.

Secondly, capital markets have not fully supported the green transition. Elderson highlighted the need to develop and harmonise stock markets in the EU, enabling them to drive investment in greener technologies. Advancing the capital markets union proposed by the European Commission will enhance the efficiency and resilience of the financial system in Europe, he said.

Thirdly, banks’ practices in managing climate-related and environmental risks were found to be underdeveloped and insufficiently applied. Elderson repeated his rebuke of eurozone banks over their failure to align practices with expectations and help customers navigate the transition to a sustainable future.

While private resources are crucial for financing the green transition, Elderson acknowledged the role of the public sector, calling for public investment, co-financing, private-public partnerships, or state guarantees. The EU’s national recovery and resilience plans, financed through the Next Generation EU programme, are expected to finance these investments. Additionally, he proposed establishing a European climate and energy security fund to supplement public investment efforts.

Elderson also highlighted the insurance gap for climate-related catastrophe losses in the EU. Only a fraction of such losses is currently insured, posing risks to economic recovery, increasing banks’ exposure to credit risk, and potentially weakening governments’ fiscal positions.

Just last month, Elderson stated that it should not be controversial for central banks to take climate-related considerations into account, a notion shared by Banque de France governor François Villeroy de Galhau. Elderson cited the ECB’s actions, such as tilting corporate bond purchases towards issuers with better climate performance and incorporating climate-related considerations in collateral assessments for borrowing.

Elderson reinforced the ECB’s position that banks’ practices must be fully aligned with the ECB’s expectations regarding climate-related risks by the end of 2024.