With the results of its strategy review, the European Central Bank has confirmed that it needs to consider climate change in setting and implementing monetary policy. This is a watershed moment that deserves to be celebrated. Unfortunately, we don’t have much time to do so. In August, the Intergovernmental Panel on Climate Change’s 2021 report warned that humanity may not be able to adapt to the drastic climate shift we are about to experience. To limit climate change, the coming years will be crucial.
In the light of this, the full year that the ECB will take to review its collateral valuation and risk control framework seems irresponsibly long. Now that governments, companies and financial institutions are taking concrete and tangible action on the basis of the available climate data, there is no reason for the ECB not to follow suit sooner. This is especially true as the ECB, in its role as supervisor, is obliging banks to demonstrate action in terms of managing and reporting on climate risks. The Banque de France was able to conclude that the Eurosystem’s collateral framework is not in line with the Paris agreement. We also know that the share of fossil-intensive firms in the ECB’s portfolio is twice as high as their share in the overall economy.
These findings imply that the ECB is working against the stated climate policies in the European Union. However, according to article 127(1) of the Treaty on the Functioning of the EU, the ECB has an obligation to support the economic policies in the Union, including environmental protection, without prejudice to price stability. While these ‘supporting objectives’ have been neglected since the establishment of the ECB, the strategy review was a perfect opportunity to acknowledge and act upon them.
Unfortunately, the reasons given by the ECB to start taking climate change into account almost exclusively relate to risk: the risks to its primary objective of price stability, to financial stability and to the value of the assets on its balance sheets. The announcement contains little about the ECB’s mandatory supporting role.
The reluctance of the governing council to invoke this part of its mandate can be explained by the understandable fear that climate change mitigation may not remain the only supporting objective to be considered. However, in view of the political environment and the dramatic economic and societal challenges in front of us, it is no longer feasible to simply ignore the existence of the supporting objectives. Limiting climate change clearly stands out as a political urgency, as witnessed by the priority given by policy-makers through the Green Deal, the Climate Law and the Next Generation EU Recovery Fund.
Acknowledging climate change mitigation as a supporting objective would imply a more proactive role of the ECB. Merely avoiding risks no longer suffices. The ECB should strive for its policies to actively support the decarbonisation of the economy. There are well-developed ideas as to how the ECB can do this within its mandate.
The ECB has announced measures including adjustments to its collateral framework and asset purchase programme. However, these measures should also include refinancing operations aimed at specific green lending by banks (green targeted longer-term refinancing operations) like the Bank of Japan is already doing. An obvious place to start would be lending for increased energy efficiency of real estate, thus supporting the Green Deal flagship initiative of the Renovation Wave. Another option would be for the ECB to purchase larger quantities of green bonds issued by the European Investment Bank. This would require the EU’s political authorities to mandate the EIB to finance more environmental investments.
Now that the ECB has accepted the relevance of climate change for its monetary policy, it needs to adapt its ways. This will be uncomfortable for central bankers who are used to basing their decisions on established data and models. With climate change, decisive and timely action is of the essence. Complete information on the dynamics and full effects of climate change may become available only when it is too late. The EU treaty provides guidance. Article 191(2) introduces the precautionary principle that encourages the adoption of preventive measures to avert serious or irreversible damage when full scientific certainty is lacking.
Some members of the ECB governing council are concerned that climate change considerations will take them into political waters and might threaten their independence. However, the ECB’s failure to act upon climate change, despite its clear mandate to do so, may be the bigger threat to its independence. The ECB will need to redefine what independence means in terms of climate change. Only increased dialogue and active coordination with political actors will enable the ECB to live up to its mandate.
The outcome of its strategy review is a promising sign that reality is starting to sink in. The ECB cannot afford to wait until the next strategy review in 2025 to take these steps. By then we may have lost the climate change battle.
Rens van Tilburg is Director of the Sustainable Finance Lab at Utrecht University. Seraina Grünewald is a Professor of European and Comparative Financial Law at Radboud University Nijmegen.