ECB reforms fall short of climate challenge, report finds

January 22, 2024|Written by Katy Lee|European Central Bank

Reforms by the European Central Bank (ECB) aimed at reducing its environmental impact are falling short of what’s needed to address the climate crisis, according to a new policy report by Positive Money Europe and the Heinrich Böll Foundation.

The report, A Roadmap Towards Greening the European Central Bank, makes a slew of policy recommendations to better utilise the tools at the ECB’s disposal to fight climate change, including a dual rate approach to offer better lending conditions to green projects.

The authors urge the central bank to use its forthcoming 2025 strategy review, as well as new measures expected this year intended to better align its operations with the Paris Agreement, to turn these recommendations into a reality.

“Central bankers have come to recognize the systemic dangers of climate change for the financial system,” the report says.

“This year the ECB published its first climate-related financial disclosures, providing information on its portfolios’ carbon footprint. But more is needed. It is time to move past climate reporting and disclosures, towards risk mitigation. Now that we know the risk on the horizon, we must also act on it.”

The report argues that the ECB is legally required to act, given that climate change poses risks to its ability to maintain the stability of prices and the wider financial system.

In 2021 the ECB unveiled a climate action roadmap which notably attempted to improve the environmental credentials of its collateral framework and asset purchase programme.

This new approach followed criticism over carbon bias in the ECB’s monetary policy operations due to its adherence to the principle of market neutrality, which reinforced the status quo of carbon-intensive companies being over-represented in financial markets.

While the roadmap indicated the ECB’s willingness to shift away from market neutrality in a bid to address the climate crisis, the new report points out that it adopted a risk-based approach that limits the ECB to assessing climate-related risks to the financial sector.

Instead, Positive Money Europe and the Heinrich Böll Foundation have urged the ECB to consider the impact of its own balance sheet on the environment.

The report also points to limitations in the ECB’s approach to corporate bond purchases, pointing out that “under its current strategy, the ECB would still hold a substantial share of carbon-intensive bonds in 2030”.

With high interest rates disproportionately affecting renewable energy projects which require more capital than fossil fuel projects, the report argues that the ECB’s current monetary policy approach “is effectively hindering the green transition”.

Among the key recommendations is the creation of a green targeted longer-term refinancing operations (g-TLTRO) programme that would offer better refinancing terms to banks engaging in green lending, starting with projects in the renewable energy and housing sectors – effectively, a dual rate.

ECB executive board member Isabel Schnabel signalled this month that the ECB could consider dual interest rates, while French president Emmanuel Macron has also expressed his support.

The report also calls on the ECB to amend its capital requirements to reward banks whose holdings have lower footprints; actively divest from dirty bonds and replace them with green ones; create a permanent green public bond purchasing facility; and introduce environmental footprints in the calculation of haircuts.

This page was last updated January 23, 2024

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