Sustainable Finance & Central Banks

Addressing the threat of climate change requires a major shift in how financial resources are allocated. Positive Money campaigns to align the European Central Bank’s monetary policy with the EU’s sustainability goals.

Climate change is probably the biggest challenge our society is facing right now. Massive investment is needed: the European Commission estimates 180 billion euros per year is needed for the next two decades in order to finance renewable energy, green transportation systems, and make our buildings energy efficient.

Unfortunately, the current financial system is not helping. Right now, investors still have many incentives to put their money into fossil fuel industries and speculative activities, instead of towards the investment we need to transition the economy. Economists describe this phenomenon as the “tragedy of the horizon”: the financial sector tends to focus on short term profits, while society as a whole needs finance to look at long-term sustainability.

Climate change itself is a threat to the stability of the financial system. The value of many financial assets rests on the future use and extraction of fossil fuels. The financial system could collapse when society moves away from the carbon economy, destroying entire sectors of the current economy – wiping out billions of underlying investments.

In 2015, the European Union ratified the Paris climate agreement, which clearly acknowledges that the green transition cannot happen unless financial flows are aligned with the climate change goals. We can’t do that unless the ECB is involved.

No green finance without green central banks

Among the EU institutions, an important conversation on “sustainable finance” has already started. In 2017, the European Commission launched a high-level group of experts who formulated a list of recommendations to the EU.

Recommendations include changing incentives within the financial sector itself, for example by forcing all companies and investors to disclose the carbon-impact of their investments.

While this strategy is needed, there is a danger that this will move finance too slowly.

Positive Money thinks the planet cannot afford to wait for the private sector to catch up with the necessity of tackling climate change. The public sector needs to step up to pioneer the investment needed in greening the economy. Central banks are no exception to that.

Positive Money’s goal is to make sure that the ECB and national central banks in the Eurozone adjust their policies to the EU’s environmental commitments.

Central banks have powerful tools such as collateral eligibility requirements and quantitative easing in order to steer the financial markets towards better capital allocation. Unfortunately those instruments are currently exacerbating climate change. For example, the ECB has invested more than 130 billions euros into corporate bonds that contribute massively to greenhouse gas emissions. This kind of policies should either stop or incorporate sustainability criteria.

Instead of just purchasing what the current market offers and perpetuating the status quo, the European Central Bank could directly provide funding for pan-european investments into green infrastructure.

How to green the European Central Bank

In February 2018, the European Parliament adopted a report which recalls that the ECB is bound by the Paris agreement, and therefore should start taking action on the matter. Positive Money’s goal is to push the Parliament’s report further by making the ECB comply with the Paris agreement ratification.

Our campaigns and advocacy work currently cover the following proposals to make central banks green:

Positive Money argues that the ECB should at the very least exclude companies involved in fossil fuel activities of the list of eligible companies to the quantitative easing programme. Since 2017, we have been coordinating a coalition of more than 70 NGOs who agree that the ECB should stop dirtying its hands this way.

This would pave the way for an overall update of the ECB’s collateral eligibility framework to make sure that all standard market activities of the ECB incorporate sustainability criteria.

It does not make sense to sacrifice public investment through austerity policies when at the same time the European Central Bank is injecting more than 2.5 trillion euros into financial markets through quantitative easing.

Quantitative easing is so far a wasted opportunity to boost investments into the green transition. Positive Money has been campaigning since 2015 for a “green quantitative easing”. With this alternative approach the ECB could allocate a significant part of the QE programme specifically towards investment into the green transition.

We are part of a large coalition of NGOs and prominent academics and politicians who think the ECB should allocate 1 trillion euros to finance the energy transition.