Recent legal research suggests that the EU legislation confers upon the European Central Bank a legal obligation to promote environmental protection – and not just when it comes to reducing printing and switching off office lights. Failure to do so could invalidate some of the ECB’s policies.

The European Central Bank’s mandate is often perceived as a very narrow one, focusing on price stability as its quasi-unique objective, while other central banks, like the US Federal Reserve, have a dual mandate including full employment. Presumably, this limits the ability of the ECB to look at other policy areas in which it could in theory contribute – such as financing the green transition.

However, after a closer look, the ECB’s mandate – as set in the Treaty of the Functioning of the EU (TFEU) – actually does confer a larger set of priorities for the European Central Bank than just its inflation target. Indeed, both Article 127 of the Treaty on the Functioning of the European Union (TFEU) and Article 2 of the ECB’s statutes reads:

Without prejudice to the objective of price stability, the ESCB [European System of Central Banks which comprises all EU central banks including the ECB] shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union.

In turn, Article 3 of the TEU states that:

“[the EU shall] work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.

In addition, the fact that the EU has ratified the Paris agreement provides another layer of legislation that binds the ECB to also pursue the goals of the Paris agreement, such as aiming for a 1.5° global warming. As a matter of principle, all international treaties such as the Paris agreement do bind all EU institutions, including the ECB.

Those arguments have been used as a legal basis for the European Parliament when it called, in a report on sustainable finance, for the  ECB should “explicitly take into account the Paris Agreement and ESG goals in its guidelines orienting its purchase programmes.”

On several occasions, the ECB has acknowledged the legality of those claims. And to be fair, the ECB has already taken steps to promote environmental protection. Since 2010, the ECB has produced an “environmental statement” in which it sets out concrete environmental goals. In 2016, the ECB had 13 environmental objectives and impressive list of 34  measures to be taken, such as encouraging low-carbon mobility for its employees and reducing the global footprint of the ECB. More recently, the ECB also joined the Network for Greening the Financial System which aims to explore ideas and policy options for steering the sustainable finance agenda.

However, it is striking that the ECB has so far taken no step at all in order adjust its monetary policy operations accordingly – and corporate QE in particular. In fact Draghi even admitted last July 2018 that the ECB had not even carried out an analysis of the carbon impact of its corporate bond purchases.

Thus, the ECB seems to think that the environmental duties of the ECB can apply in certain areas of its organisation, but extraordinarily this does not and should not affect its core task – the definition of its monetary policy.

New legal research explain why the ECB’s thinking is probably wrong.

In a recent paper (pdf), Dr Javier Solana, Lecturer in Commercial Law at the University of Glasgow, provides strong arguments why the ECB is wrong to think of monetary policy as isolated from environmental concerns. Importantly, Solana’s paper finds that the legal implication of the Article 11 TFEU could be even stronger than Article 127 and Article 3 above-mentioned. Article 11 TFEU reads:

Environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development.

According to Solana, the importance of this Article lies in the “principle of integration” which has been introduced in earlier Treaties of the EU. In several of its rulings, the Court of Justice of the European Union (CJEU) has found that Article 11 should be interpreted as “a horizontal and cross-sectional” clause that applies to all policies of the Union. There is no reason why Article 11 TFEU should not apply to monetary policy too.

Solana argues that Article 11 TFEU imposes a procedural obligation on EU institutions to “take into account” environmental protection concerns when designing and implementing EU policies. In the case of the ECB, this would mean an obligation to evaluate the environmental impact of its policies before their adoption and implementation.

“Failing to incorporate environmental protection could invalidate Corporate QE”

According to the paper, failing to incorporate environmental protection concerns into the Eurosystem’s decision-making process could cast doubt on the validity of the CSPP and other measures of monetary policy. In light of Mario Draghi’s acknowledgement that the ECB had not carried out an analysis of the impact of the CSPP on climate, concerns about the validity of the programme are particularly acute.

To conclude, no one is questioning the fact that the ECB’s paramount objective is to maintain price stability, nor that the ECB’s independence framework generally confers a large degree of autonomy and discretion for the ECB to decide on its policies. However, when focusing on this objective of maintaining price stability, Article 11 TFEU compels the ECB to take into consideration the effect that its monetary policy will have on the environment. Failure to do so would expose the ECB to the risk of litigation, and could threaten to invalidate the relevant measures of monetary policy. The negative effects that unwinding such measures could have on financial stability are anyone’s guess.

The CSPP has been running for more than two years already, but it is not too late for the ECB to review its programme and adjust its decision-making process accordingly. It is more urgent than ever that the ECB delivers on Draghi’s promise to provide empirical research on the climate impact of CSPP. Taking the first steps in that direction would also put the ECB at the forefront of international initiatives to gain a better understanding of the impact of finance on climate change.


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