ECB Converges on Green Policy as Activists’ Patience Wears Thin

European Central Bank officials are finally building a consensus about how they might start delivering on President Christine Lagarde’s ambition to combat climate change.

After more than a year of debate about how to reconcile her push with the institution’s price-stability mandate, policy makers are closer to finding common ground. Rather than the controversial option of actively choosing to buy greener bonds, they’re likely to take account of the financial risks of carbon-intensive industries in their purchase programs.

ECB Converges on Green Policy as Activists’ Patience Wears Thin

A shift in the ECB’s view on “brown” securities could have consequences for the collateral banks can use to obtain money from the institution, and its bond-purchase programs too. These include billions of euros of private-sector assets whose accumulation has long been criticized by activists for financing some of the world’s greatest corporate polluters.

ECB Converges on Green Policy as Activists’ Patience Wears Thin

New protests outside the ECB in Frankfurt this week were a reminder of the political backdrop as the institution tries to forge a climate-friendly monetary policy at the same time as Europe pursues wider efforts to become the biggest global issuer of green debt.

While the coronavirus crisis has slowed progress, signs of convergence emerged recently with comments by two leading Governing Council members laying the groundwork for a new policy that is likely to be evolutionary rather than anything radical.

“We’re going to be stopping a long way short of the ECB actively getting involved in financing the quite extensive levels of investment that we need for a green transition,” said James Nixon, head of thematic research at Oxford Economics and a former ECB official.

ECB Converges on Green Policy as Activists’ Patience Wears Thin

Francois Villeroy de Galhau and Klaas Knot, two officials driving the climate debate, both spoke out this month in favor of decarbonizing the ECB’s corporate-bond holdings, with the former adding that this should also apply to collateral.

Villeroy, the Bank of France governor, suggested last week that the ECB could “tilt” purchases to favor securities aligned with commitments to reduce global warming, and factor climate risks into its risk management. His proposal is one of the most comprehensive yet formulated.

Knot, the Dutch governor, said hours later that central banks could help unlock green investments by correcting the carbon bias in capital markets.

ECB’s ‘Pusher’

Such ideas would probably find Lagarde’s support. She prioritized climate change ever since taking the ECB’s helm 16 months ago, and described herself last week as a “pusher” on the topic. Underpinning that is her view that environmental phenomena can very much affect growth and inflation.

Lagarde also says she’s realistic on what can be achieved, acknowledging the challenge posed by the strictures of her mandate. Critics of her push argue that deliberately favoring green assets and industries should be left to politicians rather than central bankers.

Bundesbank President Jens Weidmann is among more conservative officials, arguing that the ECB should factor climate change into its risk management, and should insist on bond issuers and rating agencies being more transparent. He opposes using monetary policy to pursue climate aims, for example by adopting a green bias.

“It may well be that the Governing Council finds me way too ambitious,” Lagarde said at an event last week. “Maybe I will fail, but I sure want to try.”

If officials can come to a common view on shifting away from carbon-tainted securities, that would already mark progress from the institution’s initial stance that policy should remain neutral. But for pressure groups, the shift looks glacial.

“The climate crisis is unfolding at an alarming speed,” activists wrote in an open letter to the ECB this week, demanding that it cuts support for fossil-fuel corporations such as Royal Dutch Shell Plc and Total SE.

The ECB isn’t about to rush to any conclusions however. With climate change a part of its strategy review due to end after the summer, officials may still struggle to agree on a clear plan, not least because it takes time to devise a comprehensive way of assessing which companies are green enough to benefit from its policies.

“All of these things are still two to three years away from materially coming to fruition,” said Nixon at Oxford Economics. “There’s still an awful lot that they have to sort out in terms of making it operational.”

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