On July 7th, while responding to an interview by the Financial Times, Christine Lagarde stated that she wants “to explore every avenue available in order to combat climate change”. Among them, the “greening” of the European Central Bank’s 2775 billion euros asset purchase scheme. This announcement is a progress, as it opens a breach in the ECB’s usual argument that its asset purchases should be “market neutral” and therefore continue to finance the most polluting companies. However, two key questions remain unanswered: How and When?
Economical and financial actors like to talk about “greening” the financial system. But “greening” could mean two things:
- Reducing the financial flows that go to the most polluting activities.
- Increasing the support to alleged “green” activities and assets.
To be ecologically sound, the “greening” should do both. However, priority should be given to ending the support to polluting activities. In fact, any new carbon emission reduces the remaining carbon budget, developing low-carbon activities alone does not limit emissions.
Fossil fuels should especially be targeted. Already developed coal, oil and gas reserves exhaust the carbon budget for a 2°C trajectory. Even if we magically phased-out coal overnight, already developed oil and gas reserves would push the world above a 1.5°C global warming.
Despite these scientifical facts, it is likely that the ECB will choose to focus on providing more support to “green” activities. It is the politically easiest option: no need to “punish” polluters, money keeps on flowing for everyone.
Such a decision would be unjustifiable as it would go against the ECB’s mandate:
- The positive impact of “green” on financial stability has not been demonstrated. On the contrary, we know that fossil fuels generate climate-related risks and – through the many dimensions of these risks – foster financial instability.
- When contributing to climate change, polluting activities endanger price stability and impact monetary channels. The multiplication of stranded assets and increased credit risks could significantly impair the ability of central banks to reach the “real” economy through their monetary tools.
The ECB is prone to talk about climate change but not to act. While Christine Lagarde now talks about greening all of the ECB’s operations, the Central Bank recently
Far too late considering the ECB plans to buy an historical 1700 billion euros of assets in 2020-2021, more than 60% of its current holdings. On July 3rd, it had already spent 365,7 billion euros through its new Pandemic Emergency Purchase program.
The more we wait, the more the ECB reinforces a so-called status-quo that plays in favor of polluting companies and locks us deeper into a unsustainable development pathway. Current corporate asset purchases actively support 38 fossil fuel companies – including 10 involved in coal -, many big polluters – like the air sector –, and even arms manufacturers. The ECB’s 1470 billion Covid-related asset purchases could end up supporting polluting companies to up to 220 billion.
We cannot wait for a potential integration of climate in 2022 while the ECB’s current purchases are locking us in a high carbon world. The ECB must start excluding the most polluting companies immediately.
Amid the crisis, the ECB has shown that it was ready to do “whatever necessary” to protect the economy and ensure the stability of the financial system. It did not hesitate to lend at negative rates and buy historical quantities of assets while simultaneously easing prudential requirements. If climate-related exclusions are not something “usual” or “conventional” for the ECB, neither was quantitative easing in 2014 and neither is its actual response to Covid-19. While the next 6 months are crucial to limit the impact of the climate crisis, refusing to exclude heavily polluting companies that refuse to get on a 1.5°C path on the ground that it is not part of the ECB’s doctrine cannot stand anymore.