ECB to flex its financial muscle in climate change fight

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FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

July 8, 2021

By Balazs Koranyi and Mark John

FRANKFURT (Reuters) – The European Central Bank will take greater account of climate change in its core policy decisions, in the latest move by one of the world’s biggest central banks to curb carbon emissions.

Europe’s most powerful financial authority made its announcement before the launch next week of a package of measures by the European Union, which is striving to lead the world in greening the economy.

ECB President Christine Lagarde, who has spoken passionately about the need for climate action and shared stages with green campaigners such as David Attenborough, has made it a priority to establish the bank’s role in the field.

Setting out interventions that will make it substantially more forward-leaning on climate than the U.S. Federal Reserve, the ECB said on Thursday that climate change would be a factor in policy relating to disclosure of financial information, risk assessment, collateral and corporate sector asset purchases.

“The ECB will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, in line with its mandate,” it said in a statement.

“These will include the alignment of issuers with, at a minimum, EU legislation implementing the Paris agreement through climate change-related metrics or commitments of the issuers to such goals,” the central bank added.

The EU has set itself a target of cutting net emissions by 55% by 2030 in an effort to limit global warming to well below 2 degrees Celsius above pre-industrial levels, as set out in the landmark 2015 Paris Agreement.

“Other central banks are going to be reading this and thinking hard about how they can show a similar commitment to greening monetary policy,” Paul Diggle, deputy chief economist of Aberdeen Standard Investments, said.

The move won cautious backing from environmental group WWF.

“The announcement of the ECB as a result of its strategy review is a major milestone,” WWF Sustainable Finance Policy Officer Henry Eviston said. “However, given the climate urgency the implementation of these commitments must now come very fast and apply to all ECB operations…”

While Lagarde stressed that climate change policy was to be led by elected governments and parliaments, she said the ECB had a duty to act because of the risks to financial stability posed by climate change disruption and the huge upheavals that will be needed to put the economy on a sustainable footing.

“It’s not just words,” she told a news conference. “It’s a commitment of the entire (ECB) governing council,” she said of the forum composed of the heads of the national central banks of the 19-member euro zone.

Other ECB decisions announced on Thursday included:

– development of new models and analyses to monitor the implications of climate change and related policies

– development of new indicators, covering green financial instruments and the carbon footprint of financial institutions, as well as their exposures to climate-related risks

– a detailed plan from 2022 to require climate change-related disclosures for eligibility as collateral and asset purchases.

– climate stress tests in 2022 of the balance sheet of the Eurosystem, which comprises the ECB itself and the national central banks of the 19-member euro area.

“It’s mostly about better information and disclosure as well as taking into account climate risks,” Guntram Wolff, economist and director at Brussels-based think tank Bruegel, wrote on Twitter.

Central banks differ on how deeply they should be involved in broader climate change policy.

While Japan’s central bank remains reticent about buying green bonds, it has announced it will provide funds to financial institutions that boost loans and investment for activities aimed at combating climate change.

The People’s Bank of China has said it increased the share of green bonds in its foreign exchange reserve investments while controlling investments in high-pollution assets. Its green bond rules ban funding for coal-related projects.

Bank of England chief Andrew Bailey said it was exploring ways to green its monetary policy portfolio after a disclosure report showed the carbon footprint of its asset holdings were consistent with a rise of as much as 3.5-4 degrees by 2100.

With Republican lawmakers breathing down its neck, the U.S. Fed is among the most reticent. While it has begun conducting more research on the economic implications of climate change, Fed chair Jerome Powell insists it is a matter for government and not something that relates to monetary policy.

(Additional reporting by Huw Jones and Simon Jessop in London; Writing by Mark John; Editing by Hugh Lawson and Alexander Smith)





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