ECB admits possible role in climate change but doesn’t put words into action

For the first time, the ECB president Mario Draghi acknowledged that the ECB could play a role in combatting climate change. Yet, the ECB announced no significant steps to contribute to its goals.



On Tuesday October 10, the European Central Bank released a response to a letter from a group of five Members of the European Parliament (Molly Scott Cato, Ernest Urtasun, Sven Giegold, Michel Reimon and Bas Eickhout), asking which steps the ECB is taking to contribute to the climate change goals of the European Union – in the context of its ratification of the Paris agreement. The later, which was ratified by the EU in October 2016 commits to "Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development." 


In the letter, Mario Draghi stresses the importance of the climate change challenge. “The ECB recognises the challenge posed by climate change and shares the view that achieving the environmental goals of the Union, including those set out in the Paris Agreement, is of great importance to our societies,” the letter reads.

The ECB also expresses its support to the inclusion of climate risks in macroprudential policy, a point that has been pushed by many civil society groups. “The ECB recognises that the correct pricing and supervision of financial risks stemming from climate change and environmental factors are key to promoting sustainable development and preserving a well-functioning financial system.” Draghi writes.

The ECB has a legal mandate to act on climate change

The ECB recognises that one of its secondary goals is to  “support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union”. Among these objectives, Article 3 of the Treaty on the European Union includes “the sustainable development of Europe based on balanced economic growth […], aiming at […] a high level of protection and improvement of the quality of the environment.”

The ECB clearly backs our view that its is mandate broad enough to cover environmental goals, as long as those objectives do not interfere with its primary goal, namely price stability. The current low-inflation environment is precisely creating room for more efforts by the ECB in this respect.

Despite strong words from the ECB, the letter shows little to no commitment to make a meaningful adjustment in policy.

The ECB’s own climate sins

If the ECB understands the "financial risks stemming from climate change and environmental factors", the ECB should recognize that climate change and environmental depletion are also caused by financial portfolio decisions, including its own.

Yet, Mario Draghi noticeably avoids discussing the climate impact of its corporate sector purchase programme (CSPP), despite the growing criticism by a large group of NGOs and researchers. Under the CSPP, the ECB has purchased 110bn EUR of bonds from most of the largest fossil fuel intensive multinationals. As we have persistently argued, this programme is highly questionable because it provides direct financial support to climate-damaging companies. This programme is sending a particularly harmful signal to market participants: namely that the ECB does not care so much about the environment.

If we are serious about building a more environmentally friendly financial system, there is no justification for excluding central banks from those efforts. Financial authorities such as central banks should lead by example by adjusting their own policies.

So what is preventing the ECB from setting out on this path?

The ECB’s letter gives an indication of the ECB’s muddled interpretation of the legal binds of the Paris Agreement. “Whereas the ECB will fully respect any decisions taken at the EU level to implement the Paris Agreement, in line with the division of competences within the EU – in the first instance – it falls to the political authorities to define and decide on the appropriate measures to achieve the objectives of the Paris Agreement,” writes Mr Draghi.

The ECB appears to delegate the implementation of the Paris agreement to political authorities, implicitly the EU Commission. Such a view contradicts the ECB’s independence, meaning that it should not seek nor take operational instructions from other EU institutions or member states.

In our view, it is clear that the Paris agreement – just like all Agreements concluded by the European Union, is binding upon all EU institutions. Although the ECB is a  unique institution, it is not excluded from this principle. Therefore, the ECB should not wait for external decision-makers to decide on the concrete measures that should be taken to implement the Paris agreement, it should take leadership in adjusting its policies, within its mandate.

How to put words into action

Within the EU, 92% of people agree that climate change is a serious issue and 79% think that “more public financial support should be given to the transition to clean energies even if this means reducing fossil fuel subsidies.” The ECB has powerful tools at its disposal to facilitate this transition, and could take the following steps in the right direction.

The ECB should review the design of the CSPP in its entirety, with the aim of adjusting it to better comply with climate change goals. This could include a revamping of the CSPP into a package of measures, involving for example, the allocation of a significant portion of the 110bn programme towards sustainable investments, via the European Investment Bank and its national equivalents, but also by adopting Environmental, Social and Governance criteria into its regular private sector bonds purchases.`

As a pragmatic move, the ECB should also immediately suspend fossil fuel bonds purchases under the CSPP. While it represents only a fraction of its overall money creation programme (QE), this programme is largely unpopular as illustrated in a survey by the Dutch Central Bank. The programme is also fueling criticism against the ECB itself, rendering its continuation unnecessary and there is little risk associated with stopping investments in fossil fuel bonds.

In the long run, we recommend the creation of a new contact group within the ECB in order to engage with stakeholders to explore how the ECB’s policies could be adjusted to better contribute to the environment while being fully compatible with the ECB’s price stability mandate.

A number of central banks, including the Bank of England and the Dutch National Bank, have already taken initiatives to better align their activities with environmental concerns. It is embarrassing that the ECB is so far behind. More proactive and exemplary behaviour by the ECB would in fact increase the EU’s credibility and legitimacy in its efforts to drive the financial sector towards engaging in green finance. Now that the ECB recognises the existing leeway in its mandate to support the EU’s environmental goals, it has little excuse not to make more efforts.


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