ECB should consider climate risk in its public bond holdings, Elderson says

December 6, 2023|Written by Moriah Costa|European Central Bank

The European Central Bank should consider climate and nature risks to better align its balance sheet with the broader economic policies of the EU, board member Frank Elderson said.

While the bulk of the ECB’s monetary policy assets is in bonds issued by EU member states, the climate-risk is not clear due “to the absence of a clear and reliable framework to assess their compatibility with the Paris Agreement”, Elderson said during a speech in late November.

“In my view, when there is no clear monetary policy rationale for preferring domestic sovereign bonds, we should contemplate increasing the share of EU supranational bonds in our total bond holdings to avoid potential climate and nature-related risks and to better align our balance sheet with the general economic policies in the EU”.

This consideration should apply not just to new bond purchases but to any discussion on the composition of the ECB’s current bond portfolio, he added.

Elderson also said the central bank should consider greening longer-term refinancing operations in the same way that the bank offered targeted longer-term refinancing operations that excluded housing loans to avoid contributing to the real estate bubble.

“Similar targeting strategies can be considered to support green lending or exclude non-green lending in the future, provided an operationally efficient validation process is feasible,” he said.

He also warned that while the ECB is not a climate policymaker, the central bank’s mandate of price stability could be threatened if climate change risks are ignored.

“The massive impact of the climate and nature crises on the economy, including the financial system, makes it crystal clear that we must take climate and nature into account. In fact, if we didn’t do so, we would risk failing to deliver on our mandate,” he said.

Elderson noted that there are at least five economic consequences of the climate and nature crisis, including: inflation volatility from climate events, a complication of monetary policy analysis, a possible fall in the equilibrium rate of interest, risk to the soundness of financial institutions, and undermining the solidity of central bank balance sheets.

In other words, central banks would be better off mitigating climate risks, which “is best ensured by securing a timely and orderly transition”, he said.

This page was last updated December 6, 2023

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