In 2021, the ECB embraced a major shift in thinking by adopting its first ever roadmap on climate change. However, despite the urgency of the environmental breakdown and the rising energy prices, progress remains too slow. Together with 16 partner NGOs, we offer the ECB recommendations on how to best implement the ECB’s climate strategy.

In July 2021, the European Central Bank (ECB) outlined a detailed roadmap of its climate-related actions. This signified a major shift in its thinking for which civil society has long paved the ground. However, while welcome, the roadmap is too narrow, too slow, and too unambitious. It fails to react to the urgency of tackling the looming climate catastrophe that has been repeatedly stressed by the scientific community. In this way it also fails to protect the economic and financial system that, unavoidably, relies on social and ecological stability.

The current energy crisis, which has lifted inflation to record high levels since the creation of the euro and which is exacerbated by the Russian invasion of Ukraine, has only reinforced the urgency for the ECB to act forcefully in support of the EU’s energy transition.

This is why PMEU and its partners coordinated a position paper that calls on the ECB to support the low-carbon transition and to fully integrate climate risks and impacts into its operations. In the past years, civil society organisations have been pivotal to increase awareness of the role of the ECB in fuelling credit into toxic business activities, particularly with its Carbon Sector Purchase Programme. Together, we worked to build and push proposals that would allow the ECB to achieve its price stability mandate by greening its monetary and prudential framework.

Today we come together with 16 partner NGOs to offer the ECB a way forward. It is time for the ECB to acknowledge the inadequacy of its current policy toolkit, and to explore ways to reconcile price stability and support for the low-carbon transition.

While the ECB is currently taking steps to implement the climate roadmap, we propose four key principles that the ECB should follow when designing its policy, which would lead towards a fairer, more sustainable and democratic monetary system.

1. Act on its legal obligation to support the EU’s general economic policies, as outlined in its secondary mandate under the EU Treaties;

According to article 127(1), without prejudice to price stability, the ECB is required to “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 TEU”. Particularly, it should mirror the prioritisation of the general economic policies as reflected by the work of political institutions of the EU, such as the European Parliament and EU Council. 

2. Follow EU policymakers by recognising and enacting the double materiality principle;

In other words, when designing its monetary policy, the ECB should go beyond taking into account the risks that climate change poses to the economy and financial system. It should also keep in mind the impact that business activities have on the environment and discourage financing towards the most toxic ones.

3. Implement immediate impactful actions to align all its operations with a 1.5°C trajectory by adopting a precautionary approach and using existing data;

Data on the risks that the environmental breakdown poses to the economy is constantly being developed but they will never be able to capture the radical uncertainty inherent to events such as extreme weather conditions, and predict them with accuracy. Hence, the ECB should design policies in a way that would preventively protect the health of the planet and of humankind.

4. Work for society, by improving engagement with citizens and increasing democratic accountability.

The ECB is a public body that works for the people of the Eurozone. To legitimise its policy choices, we call on the ECB to increase dialogue with the general public and civil society, enhance transparency and improve its accountability with the European Parliament. 

Besides adopting these four key principles, we also ask the ECB to implement five first steps to bring its monetary policy in line with the binding Paris Agreement in the short term. 

1. Replace the “market neutrality” principle with a new principle that aligns with the EU’s environmental goals;

In its effort to stay neutral, the ECB tries to mirror how money is spread out in the market when designing its policies. However, by buying bonds from carbon-intensive firms according to this principle, the ECB disregards the climate risks and the environmental impact of such policy choices, leading the economy to a carbon lock-in. Criteria that align with the goals of the Paris Agreement need to be put in place.

2. Decarbonise the quantitative easing programmes and the guarantees that the ECB accepts from banks when lending to them;

When it comes to the guarantees that the ECB accepts from banks in order to be able to lend to them, the ECB should not allow collaterals issued by carbon-intensive firms. Such bonds should also be excluded from the ECB’s purchase programmes.

3. Adjust the ECB’s lending operations to banks so that they support the green transition;

When lending to banks, the ECB should adjust its interest rate to favour lending to the green economy. Banks should be able to borrow at better conditions when they intend to extend loans that contribute to the green transition. On the contrary, when bank loans are destined to finance toxic activities, banks should face discouraging borrowing rates or they should not be able to borrow from the ECB at all.

4. Take climate and environmental criteria into account when rating credit;

When assessing the quality of an asset, the ECB should set standards that go beyond financial criteria to include the climate and environmental factors as well. These standards should be ambitious and applied to all the sources informing credit ratings.

5. In its role as the supervisor of financial stability, support measures to direct money toward green activities.

As part of this supervisory role, the ECB should support measures that ensure climate risks are adequately taken into account by banks.