According to Central Bank Director Isabel Schnabel, the European Central Bank (ECB) must work harder to become greener in monetary policy. “Our measures still fall short of the goals of the Paris Agreement,” she said at a conference of the Swedish central bank in Stockholm on Tuesday.
The measures are not sufficient to ensure a path consistent with making the ECB’s activities carbon neutral by 2050. The German economist is responsible for the concrete implementation of monetary policy on the executive committee of the central bank.
In particular, Schnabel is keeping an eye on the ECB’s massive bond holdings. Achieving a stronger bias towards more climate-friendly bonds is proving increasingly difficult as interest rates are raised to combat high inflation. Not only have the bond purchases been stopped in the meantime. Bond holdings are also to be gradually reduced from March. But this is slowing down the decarbonization of the portfolio of corporate bonds, said Schnabel. “This means that we should consider actively reallocating the bond portfolio towards greener names,” she said.
Multiple options
In order to make the government bond portfolio greener, the ECB director named several options. “One is to increase the proportion of bonds issued by supranational institutions, since a large proportion of their bonds are already green.” A second option is to shift the portfolio towards more such green bonds given the increasing issuance of green government bonds by governments. “We also need to make our lending operations greener,” she said. The ECB has decided to limit the use of collateral from high-emission issuers. In addition, climate aspects have to be taken into account when determining the valuation discounts for corporate bonds. “But that’s just a first step. We need a systemic greening of the ECB’s collateral framework.”
Since Central Bank President Christine Lagarde took office in November 2019, the ECB has pledged to play a stronger role in the fight once morest climate change. When it completely overhauled its monetary policy strategy in 2021, the ECB announced, among other things, that it would take greater account of the risks arising from climate change. But not every currency guardian sees the ECB at the forefront here. At the event, Belgium’s central bank chief Pierre Wunsch remarked that it was the task of governments to combat climate change. The ECB should not try to correct the failings of others. “By saying that we have a role to play in financing the green transition, we reinforce the misunderstanding of what our role is,” he said.
You take the debate regarding the role of the ECB very seriously, said Schnabel. Monetary authorities would have to be very careful to remain firmly within their mandate. “We have to make sure we don’t pre-empt governments.” The European governments have committed themselves to the climate goals of the Paris Agreement. “So it’s not like we’re inventing new political goals,” she said. Schnabel also rejected arguments that the ECB’s policy of raising interest rates in the fight once morest inflation is slowing down the green transition in the economy, since this makes investments more expensive. Schnabel’s answer: “The green turn can only succeed with price stability.” (reuters)
