ECB Pledges to Inject Climate Considerations Into Its Decisions

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The European Central Bank set out measures to consider the environment and climate change in its decision making process, part of an effort by central banks around the world to make the financial system greener.

ECB President Christine Lagarde said policy makers will inject climate-change considerations into asset purchases and broader monetary policy. They’ll also draw up a framework for how to weigh the issue against more traditional questions about how to manage the economy and banking system.

ECB Pledges to Inject Climate Considerations Into Its Decisions

The move reflects efforts by central banks from the U.K. to China to steer investors toward backing projects with a lower pollution footprint and considering the long-term risks that they incur through support for industries that are causing the most damage to the environment. Their work, backed by Lagarde and dozens of other central bank chiefs, has given a lift to the sustainable investments business and to groups pressing for financiers to choke off funding for the most damaging technologies.

ECB Pledges to Inject Climate Considerations Into Its Decisions

“We have acknowledged that climate change is an essential challenge for the world and is of strategic importance for the ECB’s mandate,” Lagarde said at a press conference in Frankfurt on Thursday. It’s “central to what we will do in terms of our monetary framework and our monetary operations.”

Lawmakers and activists have welcomed the commitment, even as they criticize that the ECB’s efforts aren’t going far enough.

“The climate measures announced today are a good first step,” said Ernest Urtasun, a green member of the European parliament. “But the plans lack ambition and a feeling for urgency.”

The ECB’s announcement follows two years of debate by policy makers about how to treat the climate in their deliberations. It’s been a key goal for Lagarde since before she took over from Mario Draghi as president of the central bank in November 2019.

Lagarde, a former head of the International Monetary Fund, set up a workstream in the institution’s strategy review to study the issue and got endorsement for the policy. The bank also adjusted its inflation target, the biggest shift in its targets since 2003.

The ECB’s move complements the work of other central banks.

The U.K. Treasury this year delivered a new mandate for the Bank of England to help support its effort to zero out damaging greenhouse gas emissions by the middle of the century. The BOE responded with a plan to tilt its asset purchases toward greener securities and perform major stress tests on the country’s biggest banks, seeking to identify how resilient they are to climate change.

ECB Pledges to Inject Climate Considerations Into Its Decisions

Sweden’s Riksbank has cleansed its reserves of assets tied to pollution. Japan’s policy makers are providing funds for bank lending to climate-friendly businesses, and the People’s Bank of China is including direct investment in sustainable projects and encouraging issuance of green bonds.

The Federal Reserve, on the other hand, is lagging behind its peers. While the U.S. central bank joined a forum on greening finance in December, Chair Jerome Powell has argued that global warming isn’t a primary factor for monetary policy.

Lagarde’s efforts initially were met with similar skepticism by colleagues including Bundesbank President Jens Weidmann, who frequently warned that decisions affecting industry policy belong in the hands of elected governments. He later endorsed an involvement to contain the ECB’s exposure to climate and transition risks.

Here’s what the ECB committed to through 2024:

  • Accelerate the development of new models to monitor the impact of climate change on the economy, the financial system and policy transmission
  • Develop experimental indicators to track green assets, the carbon footprint of financial institutions and their exposure to climate risks
  • Make climate disclosures a requirement for the assets it accepts as collateral and considers for purchase
  • Stress-test its own balance sheet in 2022 to assess its climate-risk exposure and check whether rating agencies have disclosed enough information
  • Ensure its collateral framework adequately reflects climate risks
  • Adjust rules on corporate bond-buying to include climate risks and start disclosing climate information starting in 2023

The work will be coordinated by the climate change center the ECB set up at the start of the year.

©2021 Bloomberg L.P.

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