On February 11, Governor Villeroy developed the Banque de France’s proposals for integrating climate issues into the work of the European Central Bank (ECB). On the agenda: the recognition of the need to revise the principle of market neutrality and to initiate the decarbonation of all central bank operations; but also proposals too vague, incomplete and, above all, late to have a real impact. We decode this reference speech.

A seemingly positive dynamic

As the debate around the role of the ECB in the face of climate change rages, the Governor of the Banque de France recognizes straightaway the need for an in-depth review of ECB operations. He thus joins Christine Lagarde, Isabel Schnabel, Olli Rehn and Klaas Knot in taking a stand in favor of the revision of the market neutrality principle, which he says should not “block carbon neutrality”.

The Governor suggests decarbonising all ECB operations. He indicates that he wants to start with “all corporate assets, whether they are held on the central bank’s balance sheet or taken as collateral”.

But, if the dynamic described by the Governor seems positive, the calendar he puts forward is more than worrying.

Waiting 3 to 5 years

In fact, as he had done several times in the past, the Governor stressed that the ECB should decide on the measures to be taken by the end of the year in order to implement them within.. “3 to 5 years”!

This deadline totally ignores the climate emergency: while we only have a few years to limit global warming, the ECB will release 5 trillion euros in 2020-2022 without any environmental or climate conditions, thus supporting the most polluting activities.

Moreover, even if the Governor’s proposals were to be implemented immediately, they would be insufficient to make a significant contribution to the fight against climate change and to mitigate the related risks.

The most polluting companies preserved

The Governor’s proposed monetary policy measures consist in using climate risk to:

  1. Adjust the ECB’s volumes of corporate asset purchases;
  2. Modulate the value of corporate assets accepted as collateral (via haircuts).

These two proposals do not exclude the assets of the most polluting companies. Even when companies do not meet these criteria, their assets would still be accepted as collateral and purchased by the ECB. The only change is that the conditions under which these assets would be selected would be less favorable.

Moreover, these proposals make climate risks an additional criterion to be considered alongside other criteria, and not the only selection criterion. Unless corporate investments (capex) are studied in detail, large highly polluting companies that are considered financially sound would only be marginally impacted, even when investing in projects that are incompatible with the remaining carbon budget.

The use of climate risk involves modeling its financial materiality before being able to act. However, the “radical uncertainty” that characterizes climate risk makes it particularly complex, if not impossible, to obtain such models.

The Governor is aware of this problem. He wishes to take “climate alignment” as a “proxy” for climate risks, pending satisfactory measurement of it. However, the Governor’s definition ofclimate alignmentis problematic:

  • He evokes an alignment on 2°C trajectories, and not on 1.5°C .
  • He proposes “to use indicators that measure the effort that an emitter makes over a given period of time to lower its carbon emissions compared to its peers in the same economic sector”. This means adopting a sectoral approach based on a “best-in-class” logic, with carbon intensity most-likely used as reference metric. Therefore institutions do not have to align themselves with a sustainable climate trajectory, but simply to do better than their peers, including if that means reducing carbon intensity while maintaining or even increasing absolute emissions. The fact that the Governor is not calling for an exclusion of the fossil fuel sector (1) is all the more surprising that the Banque de France has recognized the need to start exiting fossil fuels, by adopting a demanding fossil fuel policy in January 2021, and should apply this momentum to monetary policy.
  • The Governor does not ask for specific scenarios, an imprecision that could have very serious consequences. Indeed, many climate scenarios – including those of the Network For Greening the Financial System (NGFS), which brings together central banks – are based on unrealistic assumptions, particularly with regard to negative emissions. To ensure a real alignment with the Paris Accord objectives, the Governor should be precise in his demands and impose a 1.5°C trajectory with a low level of negative emissions (2).

Forgetting refinancing operations

Beyond the above-described shortcomings, the Governor leaves aside an important question: how can the ECB contribute to the financing of the alternatives necessary for the European transition? The aim here is to contribute to local sustainable development, to reconcile environmental protection and social benefits.

In 2020, the main French banking groups borrowed 379 billion at negative rates from the ECB through its long-term refinancing operations (TLTRO III). They made hundreds of millions of euros in profits while financing anything and everything: no constraints were imposed on them to direct this money towards the ecological transition.

While the ECB has indicated that this measure was intended to facilitate the financing of VSEs and SMEs, there is no way to track to whom the loans financed by the central bank’s “grants” were allocated. Moreover, according to banking models it is much less risky to loan to a large company than to a VSE/SME, which is why some states – including France – have decided to guarantee loans granted to these companies during the crisis.

Given this observations, one thing is obvious: long-term refinancing operations (TLTROs) must be conditioned to financing the ecological transition. This “green TLTRO” could enable the financing of energy renovation throughout Europe, thus contributing to the achievement of one of the Union’s ecological priorities, with very positive social impacts.

Going further now: it’s mandatory

For the ECB, waiting is not only irresponsible, it also means abandoning its mandate of price stability, for which the fight against climate change is a prerequisite. The Governor of the Dutch Central Bank, Klaas Knot, thus indicated that “a stable climate can be considered an important precondition for central banks to be able to fulfill their mandate. »

Immediate measures can and should be taken. The Governor of the Banque de France must call for their adoption, while strengthening and speeding up his medium-term proposals to allow for a complete decarbonisation of the ECB’s operations and to support European climate objectives.


(1) Notably:

  • The exclusion of all companies that develop new fossil fuel projects;
  • The exclusion of all fossil fuel companies that do not adopt a plan to exit coal by 2030 in Europe/OECD and 2040 worldwide;
  • The exclusion of all fossil fuel companies that do not adopt a plan to exit oil and gas by 2040 in Europe/OECD and 2050 worldwide;
  • The exclusion of all companies that derive more than 5% of their revenues from non-conventional hydrocarbons.

(2) Negative emissions include CO2 capture and storage (CCS), bioenergy with CO2 capture and storage (BECCS), carbon offsetting and Nature-Based Solutions (NBS) such as afforestation. Particular attention should be paid to BECCS and NBS emissions. These should never exceed a respective 5 and 3.6 GT CO2/year in 2050.