When she took office, ECB President Christine Lagarde called for the central bank to play a stronger role in the fight against climate change. At that time, many colleagues still turned up their noses, according to the motto: Climate protection is important, but as a monetary guardian you should kindly take care of stable prices. But the Frenchwoman has shown great skill in combining both subjects over the past two years.
In its groundbreaking report “Green Swan”, the Bank for International Settlements also highlighted the possible consequences of climate change on the financial sector. The argument: The decarbonization of the global economy will lead to distortions that could have an impact on inflation, for example through shortages of certain basic materials that are important for the changeover.
For Lagarde, one thing is clear: if it is not dealt with, climate change could affect the economy in a way that entails risks for price stability. “Both are intrinsically related and connected,” said the ECB President, whose institution is also responsible for banking supervision. In the financial sector, the consideration of climate change is easy to explain: banks grant loans and the risk of default also depends on whether the borrowing company is equipped for the future. Just one example: Those who rely on the internal combustion engine in the automotive industry for too long could run into financial difficulties and possibly no longer repay their loans.
The ECB fundamentally reformed its monetary policy strategy in the summer. In addition to the introduction of a higher inflation target of exactly two percent, “green monetary policy” also found its way into the world of central banks. Specifically, the central bank would like to take greater account of the costs of climate change in its monetary policy. The idea behind this is that companies that produce with high carbon dioxide emissions bear higher business risks and could suddenly lose their market opportunities due to stricter laws. Europe’s banks will therefore have to undergo a climate stress test next year. The result will give the ECB banking supervisory authority a first impression of how risky the credit portfolios of the institutions are.
By 2024, the ECB also wants to readjust its forecast models for inflation and growth with a view to the consequences of climate change. The company’s own loan shops should also be checked. The central bank accepts bonds as security when lending to banks. This raises completely new questions: How climate-neutral are these bonds? Does it have to be charged a higher discount?
The question now is whether the central bank will sort out the “dirty finches” in the future
The ECB not only lends out bonds, it also buys these securities. Most of these are government bonds, but corporate bonds also find their way onto the ECB’s balance sheet. The question now is whether the central bank will in future typologize its portfolio of corporate debt certificates according to environmental criteria and sort out, that is, sell, the “dirty finches”. But would that be wise?
The Bank of England points out that this would not do much for a central bank. Because the promissory note would not disappear, but would go into the possession of another investor. In addition, a general sale of securities whose companies have a negative carbon footprint would also penalize those corporations that have developed an ambitious plan for climate neutrality. The British central bank would therefore like to improve the incentives for companies to arrive in the zero-carbon world.
Activists from various initiatives lie in front of the former ECB building in downtown Frankfurt next to a huge mural on the asphalt. The 300 square meter picture bears the words “Stop funding fossil fuels” and is directed against the climate policy of the ECB, Sparkasse, Commerzbank and Deutsche Bank.
(Photo: Boris Roessler / dpa)
Due to the change of direction, the monetary authorities are right in the middle of the political climate debate. Greenpeace activists recently landed with two paragliders on the roof of the ECB entrance building and unfurled a banner with the words “Stop funding climate killers”. According to Greenpeace, the action was directed “against the climate-damaging monetary policy of the central banks”.
“Green monetary policy” goes too far for some, not far enough for others
According to the organization, a study published by Greenpeace and various research institutes shows “that the ECB is systematically undermining climate protection”. The ECB and other monetary watchdogs are in a tight spot: For some, the “green monetary policy” goes too far, for others it does not go far enough.
So far, there are no clear rules for what exactly is meant by a “green” investment. The EU Commission would like to present a resolution on the EU sustainability label in November. This is a binding guideline from 2022. This lists criteria that investments must meet in order to be considered “green”.
How tricky the exact distinction between “green” and “brown” is is shown by the dispute over whether nuclear power and gas should be classified as sustainable in this taxonomy. The European banking supervisory authority Eba is meanwhile examining in which projects banks could perhaps be given a regulatory “bonus” in lending by allowing them to set aside less loss buffers for “green” lending transactions. Such a bonus is very controversial, because most regulators believe that the focus should be on the credit default risk – and not the color of the investment.
Unlike the ECB and the Bank of England, the US Federal Reserve is still holding back with “green” monetary policy. “Today, climate change is not an issue that we take directly into account when determining monetary policy,” said Fed Chairman Jerome Powell. “But we are investigating the effects of climate change on our supervisory, regulatory and financial stability tasks.” Powell made it clear that the institution’s role in this matter was limited to overseeing the banks and the rest of the financial system – the rest was a matter for politics.