Putting out the fire with a hose: the ECB’s new action plan against climate change

On 8 July, the Governing Council of the European Central Bank announced its new monetary policy strategy, which included an 'ambitious climate change action plan' to be implemented and further reviewed by 2024. The action plan is meant to underline the ECB's commitment to align more systematically its monetary policy with environmental sustainability considerations.

The ECB has committed to accelerating the development of its modelling approaches to better incorporate the risks from climate change and the transition towards a more sustainable economy in its macroeconomic forecasts, its assessments of financial stability and of the transmission of monetary policy. Concurrently to that, the ECB has pledged to experiment with the development of new statistics indicators to monitor green financial instruments, the carbon footprint of financial institutions and their exposure to climate-related physical risks. In this field, the ECB will align itself with progress in EU policies and initiatives in disclosure and reporting on environmental sustainability. These steps would allow it to better adapt monetary policy decisions to the risks from climate change.

Furthermore, the ECB action plan has set out steps to take more actively into account the environmental sustainability of activities financed by assets serving as collateral for its credit operations and/or purchased in the context of the ECB's corporate asset purchasing schemes. Disclosure requirements for private sector assets will be introduced as an eligibility condition for both collateral and asset purchases, in line with EU policies and initiatives in the field. The ECB will take into account climate change risks in reviewing the valuation of assets used as collateral and purchased. It will do that by assessing the disclosures of rating agencies and understanding how they incorporate climate change risks into their ratings of assets, by developing some internal rating standards, and by introducing requirements into the Eurosystem Credit Assessment Framework to address climate change risk, if necessary. The Eurosystem’s balance sheet will also be stress-tested to gauge the risks related to climate change.

The ECB will “assess potential biases” in the market allocation from its asset purchase programmes (in particular, the corporate sector purchase programme, the CSPP), evaluate the pros and cons of alternative allocations and potentially propose alternative benchmarks in response to questions on whether these programmes are truly in line with the market neutrality and market efficiency principles of its monetary policy operations. The ECB has recently faced criticism that these operations have been inadvertently financing economic activities that enhance rather than mitigate activities detrimental to the climate. To that end, it will also enhance its due diligence and disclosures related to the programme.

Although the action plan takes steps in the right direction, which might have even been unthinkable a few years ago, it has also been criticised for being too timid given the urgent need of taking action to meet the EU environmental sustainability objectives and of omitting certain aspects that go beyond climate change.

More specifically, the emphasis of the action plan is on assessing the risks from climate change on finance and consequently on the way the ECB conducts its policies but not on the risks that financial activity, including the ECB’s own policies (especially asset purchases), enhances climate risks, what is also known as “double materiality”. This is an important omission given the extent to which the ECB has been engaging in these activities in recent years and the evidence which has emerged that its activities are not “market neutral”.

In a similar vein, the action plan seems to be oblivious to aspects of environmental sustainability other than climate change, such as biodiversity, despite emerging evidence that its activities have an important impact there.

The action plan has also been criticised for not going a step further beyond the EU taxonomy in defining “dirty assets” (that is, those subsidising climate-detrimental activities) but simply sticking to subsidising “green” ones.

The fact that there is already a date for reviewing the ECB strategy 2024 gives some hope that the actions may be stepped up. However, the countervailing forces against sufficiently decisive action in greening monetary policy and finance should give us all pause.