On March 26th 2021, Christine Lagarde responded to a question of several MEPs regarding the ECB’s climate change policy. Once again, her response struggles to cover over the ECB’s inaction. Reclaim Finance unpacks the ECB President’s arguments.
Beyond exploratory work, the ECB should adopt a precautionary approach to climate risks
Christine Lagarde highlights the ECB’s work on climate risks, through stress-tests, ESRB research and a Supervisory Guide. If the ECB has been making steady progress toward a better understanding of climate related risks, this exploratory work is yet to produce concrete measures, notably adjustments on macro or micro prudential requirements. In fact, as the G20 Green Central Bank Scorecard reveals, the ECB and European regulators have taken no measures that would account for the risks concentrated in high carbon sectors.
This is especially problematic as all climate risks analysis – including the ECB’s – show that delaying action severely increases climate risk. While a delayed but fast-tracked transition will mainly increase transition risks, thus impacting the most carbon intensive sectors first, any global warming overshoot will significantly raise physical risks that negatively impact all economic activities – even in non-climate sensitive sectors – and overwhelmingly impact the most vulnerable communities.
ECB should adopt a precautionary approach to climate risks, i.e contribute to mitigating climate change to minimize the risks. Such an approach is all the more necessary given that it is impossible to perfectly predict climate change and its impacts. To respect their mandates, financial regulators need to consider the radical uncertainty which characterizes the related risks.
Christine Lagarde ignores the ECB’s carbon bias
When talking about the ECB’s asset purchases, Lagarde focuses on the purchases of supposedly “green” or “sustainable” assets but:
- The ECB now accepts as collateral and buys “sustainability linked bonds”, which are a new asset class that emerged in 2020 and which link the bond issuance to ESG objectives. These assets remain rare and are often linked to very weak ESG objectives; consequently they can easily turn into greenwashing. Reclaim Finance notably analyzed a “sustainability linked” credit facility that rely on the same logic and will finance a new tar sands pipeline project.
- Green bonds can also turn to greenwashing, either by supporting projects that are not truly green or by contributing to finance emitters that do not credibly plan to transition. Recent studies suggest that green bond emissions are not tied to lower GHG.
- The purchase of green bonds and “sustainability linked” bonds logically follows from the ECB “market neutrality” principle, it is not a proactive step to be “greener”. As these assets emerge, the ECB follows the market and buys more of them.
More importantly, Lagarde forgets that its asset purchases and collateral framework are both skewed toward carbon intensive activities. Isabel Schnabel and Klaas Knot have recognized the need to change the ECB’s asset purchase benchmark and the Bank of England already announced that it would exclude big polluters from its own purchases by the end of 2021. The ECB’s carbon bias notably means that it supports fossil fuel companies, even when they are planning numerous new fossil projects. Furthermore, it should be noted that the ECB refuse to disclose information that would allow it to assess more precisely the climate impact and exposure of its asset purchases.
The ECB’s carbon bias is mainly the consequence of its current “market neutrality” principle. This principle is a dangerous myth and should be reviewed.
ECB non-monetary portfolios are another ECB grey area
Despite the recent decision mentioned by President Lagarde to adopt a common stance for climate change-related sustainable investments in non-monetary policy portfolios, the ECB publishes very little information on its non-monetary portfolios.
The ECB indicates that it applies a “sustainable and responsible investment” (SRI) strategy but refused Reclaim Finance’s request for a detailed disclosure of this strategy and the criteria it contains. In the wake of this refusal, the information available suggests that the ECB’s SRI strategy is limited to targeting “an increase in its share of green securities over time”. As a recent decision suggests, this means that the ECB will buy more green bonds. However, this tells us nothing about the ECB’s investments in carbon–intensive assets and activities.
The ECB’s main objective for non-monetary portfolios remains to generate maximum returns. It is more than likely that a significant share is invested in high carbon sectors, including in fossil fuels.