Contrary to common belief, the European Central Bank’s current mandate and legal framework already gives ample room for action in the field of climate change. Now is the time to move the debate to the next stage: policy design.
Stanislas Jourdan contributed to this article.
The transition to a low-carbon economy requires massive redirections of financial flows towards sustainable projects. As acknowledged by the Network for greening the Financial System (NGFS) in its first report, central Banks have a decisive role in taking up this challenge since they directly influence the destination and level of credit, the cost of capital on financial markets and are responsible for safeguarding financial stability.
However, many people tend to assume that the ECB’s current narrow mandate prevents it from taking any steps in that direction. In this article, we want to demonstrate that there is the ECB’s mandate is no barrier to taking effective action. On the contrary, we show that ECB officials have at their disposal all the legal room they need to develop green monetary policies, starting immediately. However, what is needed is a shift in attitude and mindset in the interpretation of the evolving EU legal framework, and consequently, of the ECB’s mandate.
Environmental protection is already a formal objective of the ECB
It is unquestionable that the primary objective of the ECB is to pursue price stability. However, the European Treaties also task it with certain additional objectives. Indeed Article 127 reads: “without prejudice to the objective of price stability, the ESCB 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 TEU”. In turn, article 3 explicitly includes the objective of “sustainable development of Europe based” – among other factors – “on a high level of protection and improvement of the quality of the environment”. Hence article 127 of the TFEU is already sufficiently broad for the ECB to develop green monetary policies.
But there is more. As pointed out by Javier Solana, article 11 of the TFEU « imposes an obligation on the Eurosystem to “take into account” […] horizontal objectives of environmental protection when designing and implementing measures of monetary policy ». Although article 11 does not consecrate environmental protection as an absolute priority, it still forced policymakers to take “due account of ecological interest” in the process of policymaking. From this lens, the biased design of the ECB’s corporate bond purchase programme towards highly carbon-intensive sectors could be seen as a violation of the aforementioned principle.
Hence, a careful analysis of the EU legal framework shows that the ECB is not just empowered to support the EU’s fight against climate change, but it also has a procedural obligation to consider the impact of its policies on the protection of the environment. This argument seems to be acknowledged by the Europan Central Bank. For example, Benoit Coeuré recently declared: “there is scope for central banks themselves to play a supporting role in mitigating the risks associated with climate change while staying within our mandate.”
This being said, the main challenge for the ECB is how to address the trade-off between the many different (and sometimes conflicting) objectives of the Union. For example, Article 3 of the TUE also includes goals on growth and full employment. Following this reasoning, “why the ECB should not promote industries that promise the strongest employment growth, irrespective of their ecological footprint?” asks Benoit Coeuré in his speech. The prioritization of the various and numerous EU objectives is indeed a tricky question, but not an insurmountable one, as we will see below.
The Paris Agreement prioritizes fight against climate change
The ratification of the Paris agreement on climate change by the European Union helps solve Mr. Cœuré’s dilemma. As an international treaty signed by the EU, the Paris Agreement is binding to all European institutions, including the ECB. Moreover, the Paris agreement is relevant to the ECB because it touches directly upon financial regulation, including by “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development.” (Article 2).
By ratifying the Paris agreement, the EU has de facto agreed to prioritize the fight against climate change. Indeed the Paris agreement recognizes “that climate change represents an urgent and potentially irreversible threat to human societies and the planet”. It is indeed hard to forecast a stable rate of growth and good employment in an economy subject to the consequences of high temperatures and regular extreme weather conditions. From this rather obvious logic, it appears that rather than being a conflicting objective, the fight against climate change must be seen as a necessary precondition for the EU to keep achieving and sustaining its other economic objectives.
Once again, the European Central Bank has endorsed this logic. Pressure from the European Parliament led Mario Draghi, in February 2018, to publicly state the “ECB is party to the agreement” and recognized “the importance of policies aimed at addressing climate change”.
The European Parliament has already endorsed this logic several times. In May 2018, the Parliament adopted a report calling to explicitly take into account the Paris Agreement and ESG goals in its guidelines orienting its purchase programmes”, a recommendation it reiterated in January 2019 as part of its annual resolution on the ECB. This shows the ECB has the confidence of the (current) European Parliament to move in this direction.
From debate to policymaking
The existing European Treaties, together with the Paris agreement, already give the European Central Bank significant scope to integrate the fight against climate change within its mandate, objectives and policies. And the European Parliament has already indicated its confidence in doing so. Of course, further clarification in the ECB’s mandate may be necessary on the longer run, but at this stage there are no legal barriers preventing the European Central Bank from taking initiatives towards aligning its policies with the fight against climate change.
Ultimately, the question is: if the ECB can preserve price stability while also tackling climate change, why should the ECB not do it? Opponents to greening central bank policies often mention that it would somehow “dilute” the focus of central banks on the fight against inflation, but they rarely provide concrete examples of how this threat would materialise. The only way to find out is to move this debate into actual policy making process, in order to check the necessity and proportionality of the proposed measures.
A priority for the ECB should be to integrate climate-related financial risks in their own risk management framework and ensure that credit ratings agencies do so too. As a purely prudential approach, this measure falls uncontroversially within central banks’ mandate to protect price and financial stability from being harmed by acute and chronic climatic hazards.
However Positive Money Europe advocates that the ECB can and should go much beyond the climate risk approach. In our recent report, we advocate the ECB should start by implementing climate reporting obligations as part of its asset purchases (in particular CSPP), with a view to developing green collateral eligibility requirements and to re-allocate its purchases towards less carbon intensive sectors.
Finally, it would not be hard for the ECB to further support green transition investments, for example by supporting the activities of a “European Climate Bank” as President Macron has called for. Indeed, the ECB already purchases up to 50% of the bonds issued by the European Investment Bank (EIB) through quantitative easing, and would certainly be happy to buy more if there were political willingness to increase the lending volume of the EIB or any equivalent institution.
The ECB operates in a constantly changing environment and an institutional framework whose priorities are also evolving. As an independent guardian of long term economic sustainability, the ECB has no choice but to act quickly. As we showed, the legality of green monetary policy measures are hardly questionable, but does legality mean legitimacy? In that respect, further consultation and dialogue with the European parliament may provide a useful accountability channel to further validate, or enshrine the ECB’s legitimacy to act, notably by prioritizing (if necessary) its secondary objectives.
Nicolas is a contributor to Positive Money Europe. He holds a MA in Political Sciences from the University Catholic of Louvain and has studied political economy during his study trip at the EHESS in Paris. He previously worked for CADTM and was trainee for a Proxy Advising Firm. During his studies he investigated the topic of sovereignty and fiscal dependence to financial markets. His work has been awarded by the Higher Education & Research Award for Future Generations.