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Campaigners are urging the European Central Bank (ECB) to look beyond climate change in the forthcoming shake-up of its collateral framework and consider wider nature-related risks such as biodiversity loss.
A report published on Wednesday, titled “Nature’s Nudge: The role of collateral frameworks in the transition towards a sustainable economy”, argues that the ECB could create a powerful disincentive for commercial banks to finance polluting activities by excluding dirty assets from being used as collateral when borrowing from the central bank.
The paper, a collaboration between advocacy groups Positive Money and WWF, also suggests the ECB could apply higher haircuts for assets from polluting companies, in order to better reflect the reality of the risks they pose to the planet.
“By reducing the value given to dirty assets the ECB has a real opportunity to send a clear message that environmentally destructive practices have no place in our economy,” said Uuriintuya Batsaikhan, head of research at Positive Money Europe and a co-author of the report.
The ECB has been praised for various green initiatives and performed strongly in the Green Central Banking Scorecard of G20 economies released last month.
However, the ECB’s collateral framework – which governs the assets that commercial banks can pledge in order to borrow from it, and how these assets should be valued – is not aligned with green targets. According to an analysis by the Economist Intelligence Unit, the ECB’s collateral pool included an estimated €250 billion in assets linked to bonds used to fund new fossil fuel infrastructure as of May.
The ECB is set to review its collateral framework in the coming months as part of its 2024-25 climate and nature plan. But according to the report, the current plan mainly focuses on updating the framework to better address climate risks, rather than incorporating broader environmental risks such as biodiversity loss or ecosystem collapse.
The report points out that nature loss and climate change exacerbate each other and interact in numerous ways. The co-authors use data from the Banque de France to illustrate how companies are often both victims of and major contributors to environmental degradation.
Nature loss and climate change “should be considered as equally important financial risks in the ECB´s collateral framework”, Positive Money and WWF said.
This page was last updated October 10, 2024
Written by
Katy Lee has been a writer for Green Central Banking since early 2024, focused on our Asia coverage. A Paris-based journalist who has written for major international titles for more than a decade, she is the co-host of The Europeans, an award-winning podcast about Europe which often covers environmental issues.
