ECB climate plan includes monetary policy, nature risk and green transition

February 5, 2024|Written by |European Central Bank

The European Central Bank (ECB) will consider climate change in its monetary policy preparations as it expands its commitment to combating climate change, including nature and transition risks.

The central bank released a roadmap on Tuesday for how it plans to approach climate and nature issues over the next two years.

Part of those plans include exploring changes to its monetary policy strategy in the transition to a green economy.

“The ECB will explore, within its mandate, the case for further changes to its monetary policy instruments and portfolios in view of this transition,” the central bank said in a press release.

The ECB will also expand its work to cover transition risks, physical impacts from climate change, and risks from nature loss and degradation.“A hotter climate and the degradation of natural capital are forcing change in our economy and financial system. We must understand and keep up with this change to continue to fulfil our mandate”, ECB President Christine Lagarde said in a press release.

That work includes studying the effects of a green transition and green investment needs, as well as advancing its macroeconomic modelling framework to include a focus on climate change.

The ECB will also include climate change impacts in climate scenarios, as well as in frameworks used to predict future economic conditions. In addition, it plans to explore the insurance protection gap, as well as explore the financial impact of biodiversity and nature loss.

The outlined focus areas “will complement the ECB’s current climate-related actions in its ongoing tasks, including monetary policy and banking supervision”, the ECB said.

The ECB has a secondary mandate to support general EU economic policies, which includes the transition to a net-zero economy. EU lawmakers recently passed a provisional agreement that expands the ECB’s remit to include the supervision of bank transition plans.

Advocates have been putting pressure on the central bank to expand its climate focus, including through a green dual interest rate.

While the roadmap is a good step in the right direction and the fact that the ECB is willing to explore nature and other risks demonstrates progress but more needs to be done to fight climate change, said Uuriintuya Batsaikhan, an economist at Positive Money Europe.

“At this point we need leaps and bounds in the fight against the catastrophic impact of climate change and biodiversity loss,” she said.

Introducing a green lending programme would be a welcome addition to the ECB’s climate roadmap, and well within the central bank’s mandate, she said. In addition, the bank could stop funding polluting assets that are not aligned with the Paris Agreement.

“Without ambitious and impactful actions, we risk being lost in transition,” Batsaikhan said.

This page was last updated February 5, 2024

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