The ECB Paris Gap: Substantive but Treatable

In July 2022, the European Central Bank (ECB) announced plans to decarbonise its monetary policy and support the green transition by targeting its corporate bond purchasing programme and collateral framework.

This study – produced by the University of London, University of the West of England, University of Greenwich and Greenpeace – evaluates the ECB’s plans. It concludes that while they show progress, they also have “narrow scope” and “lack ambition”, resulting in significant attainment gaps in meeting Paris Agreement benchmarks.

To meet these benchmarks and align with its own primary and environmental mandates, the authors propose the ECB adopt “climate neutrality” as a guiding principle. They also suggest that the ECB use combined climate footprint and activities-based metrics, and increase the scope and urgency of its decarbonisation plans.

The study’s central recommendation is for the ECB to adopt climate neutrality as the guiding principle for decarbonisation. In contrast to “market neutrality” which the authors claim hardwires carbon bias into policy, carbon neutrality requires reducing or eliminating sectors inconsistent with Paris-aligned transition pathways, irrespective of their market share.

The study references an earlier report by the New Economics Foundation and others which show that adopting climate neutrality would not impair the transmission mechanisms of monetary policy or require changes to the overall volume of corporate bond holdings.

To effectively decarbonise corporate bond holdings, the authors make a number of proposals. They suggest that ECB should:

• include all holdings in climate evaluations rather than only re-investments;
• use combined activities-based taxonomies with climate performance metrics to enable a sufficiently rapid and Paris-aligned “strong titling” approach;
• and include scope 3 emissions and sector-specific Paris benchmarks to evaluate emissions progress.

The authors also highlight the limited scope of plans to decarbonise the collateral framework and are critical of the ECB’s exclusive focus on risk. To improve the effectiveness of the planned reforms to their collateral framework, they recommend using combined climate footprint metrics and activities-based taxonomies for adjusting haircuts and eligibility criteria. They also suggest expanding the limits regime — which will limit the share of carbon-intensive assets pledgeable as collateral as of 2024 — to the whole of the ECB’s collateral framework.

The study also recommends developing in-house science based assessments at both the ECB and national central banks to reduce reliance on credit ratings agencies, as well as expediting the timeline for mandatory climate-related disclosures in eligibility requirements.