To ensure monetary policy does not conflict with the EU’s carbon neutrality targets, the European Central Bank must replace its current ‘market neutrality’ approach and rely instead on the EU taxonomy, a new briefing by Positive Money Europe argues.

Under the leadership of ECB President Christine Lagarde, a debate has finally started on whether and how the European Central Bank should play a role in supporting the EU’s climate and environmental objectives.

As this debate evolves, a key aspect is now focusing on whether the central bank should follow a strict ‘market neutral’ approach when conducting its operations. In practice, the market neutrality principle is implemented by buying bonds in the same proportion as their market share, which ultimately leads to investing into polluting sectors. Many civil society groups and think tanks have recently criticised this, with Greenpeace and the WWF calling for the market neutrality principle to be abandoned at last year’s ECB Listens event.

Positive Money Europe’s new briefing, Why and how the ECB should go beyond ‘market neutrality, explores how the principle of market neutrality clashes with the ECB commitments on climate change, while also representing a financial risk for its balance sheet.

Key points from the briefing:

  • By abiding by the market neutrality principle, the ECB is automatically contributing to climate change. Research evidence suggests that asset purchase programmes and liquidity operations are fuelling financial instability and exposing the ECB to potential financial losses.
  • As recognised by the ECB itself, market neutrality is not a legal requirement for the bank and its definition is loose and up for interpretation. Hence, there is no barrier to revisiting the ECB’s approach and including climate criteria in monetary policy.
  • Renouncing market neutrality does not necessarily mean politicising the ECB’s policies by giving total power to the ECB in adopting green criteria arbitrarily via a sectoral approach, as often feared.
  • Instead, the ECB should adopt the EU’s green taxonomy as a new benchmark when defining eligibility to its collateral and asset purchase eligibility framework. This framework has been purposefully designed to ensure a level playing field between companies and asset issuers.
  • Clear guidance on this point by the European Parliament would support a successful conclusion of the ECB’s strategy review, due to be concluded by September 2021.

It’s paramount that MEPs provide clear guidance to the ECB on the way to go to fight climate change and green their balance sheet. This means bringing an end to the market neutrality approach, which is the main obstacle stopping the ECB from truly committing to fight the climate emergency.

Read the briefing here.


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