In a speech delivered by ECB Board member Benoit Cœuré in Berlin, the European Central Bank finally shed light on how it plans to combat climate change. However, by focusing only on climate-related financial risks, the ECB could miss the bigger picture.

Better late than never. Two years after civil society warned the European Central Bank against its lack of action on climate change, the ECB is finally signalling that it takes the matter seriously – through the voice of one of its board member and prominent thought leader Benoit Cœuré.

Speaking on 8 November 2018 at a high-level conference organised by the Network for Greening the Financial System in Berlin, Cœuré made an important speech laying out his vision of the role the ECB can and should play in addressing climate change. It is the first time that such a high-level policymaker from the European Central Bank has addressed this topic, and as such represents an important breakthrough.

In his speech, Cœuré acknowledged the critics against the high carbon-intensity of its corporate bonds purchases which Positive Money Europe has been so vocal about. The ECB board member also acknowledged that there are strong legal arguments in favor of incorporating environmental protection into the ECB policies:

“I would argue that the ECB, acting within its mandate, can – and should – actively support the transition to a low carbon economy”

Cœuré’s apparent support for green action by the ECB is underpinned by a strong understanding that if climate change threatens the fate of humankind, it will also threaten the way the ECB can operate monetary policy. “Climate change is likely to affect monetary policy one way or the other – whether it is left unchecked or humankind rises to the climate change challenge,” Cœuré said.

According to Cœuré, monetary policy is likely to be affected by climate change in several ways. First, climate change will increase and accelerate the number of shocks in the economy, whether shocks related to climate migration, bad agricultural harvests or climate disasters. Second, a prolonged transition towards renewable energies might mean more volatility on oil prices which will make it more difficult for the ECB to maintain price stability.

A a result, Cœuré rightly points out that “Catastrophic climate change could thus test the limits of how far monetary policy can go and, in the extreme, force us to rethink our current policy framework.”

Both reasons call for the ECB to take bold action. Coeuré said “the ECB will concentrate its efforts on supporting market participants, legislators and standard-setting bodies in identifying the risks emerging from climate change and providing a clear framework to reorient financial flows and reduce such risks. A unified framework is a gravitational force needed to finance the greening of our economy. And it is the precondition for central banks themselves to expand the use of ESG criteria in the build-up and management of their own asset portfolios.”

In other words, the ECB will focus on non-immediate actions, mainly focusing on helping market players to identify and manage the climate-related risks. However, there is more the ECB can and should do.

Beyond the risk-based approach

First, the ECB’s strategy could be made faster if the ECB adopted its own climate risk management framework (instead of relying on the market to create one), or if the ECB clearly expressed its intention to incorporate ESG criteria ratings into its collateral eligibility framework, leading to exclusion of the most high-carbon assets from its quantitative easing programme in the medium-run. Such policy announcements would likely have an important signaling effect on the market.

Secondly, Cœuré’s approach is narrowly focusing on market and financial concerns, that is, to make sure potential future financial risks are correctly “priced in” all assets. Although valuable and necessary, we should be honest in acknowledging that no risk-assessment methodology will be able to comprehend all the spillover risks that climate change may entail at the global scale. And even if this was the case, there is no guarantee that this will automatically lead the market to an allocation of investments that is compatible with the Paris agreement’s goals.

Ultimately, the best way to prevent those climate-related financial risks to occur unquestionably relies upon an ambitious investment strategy to ensure enough financial flows shift towards the green transition. Central banks have powerful tools to do just that. Through policies like quantitative easing and collateral frameworks, the ECB can pro-actively shape the market.

Given the severity and urgency of tackling climate change, we think all options should be on the table. Positive Money Europe stands for connecting the ECB’s asset purchase programme with private and public investment towards the energy transition, for example through a cooperation agreement with the European Investment Bank. This is a promising way in which the ECB could both stimulate the economy and maintain price stability while providing a helping hand to the EU’s efforts to accelerate the shift towards a low-carbon economy.

Although the ECB will likely stop increasing QE next year, this can still be done through the reinvestment strategy. For example, the ECB could downsize its portfolio of corporate bonds and asset-backed securities while simultaneously increasing its purchase of green sovereign bonds or other low-carbon assets.

However, Cœuré judges this approach “more contentious”, and recalls the ECB’s attachment to the sloppy notion of “market neutrality” – a questionable approach which means the ECB should buy whatever asset the market supplies.

All in all, Benoit Cœuré’s speech signals good intentions from the ECB side and shows just how much progress has been made in the debate with and within the ECB. Only a few months ago, we and other NGOs were battling to make it understood that monetary policy should play a role in fostering a sustainable finance system. Despite the fact that this was excluded from the Commission’s action plan on Sustainable Finance, the ECB has just come out to say that it should play such a role. This is an important milestone for the conversation to move forward.

The next decisive line will be to define the content and scope of the ECB’s role. The size of the climate challenge means it will take more than timid, market-oriented measures. The ECB should do whatever it takes to save the climate as much as it should work to preserve the euro.


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