On Monday April 27th, 45 European NGOs wrote to Christine Lagarde, asking her to put climate at the center of the European Central Bank’s action. The President of the ECB replied on May 20th.

Its response summarizes the ECB’s position regarding climate change in the context of the Covid crisis. It reveals all of its ambiguity: The ECB acknowledges the urgent need to tackle climate change and admits that it should be part of its missions but simultaneously refuses to take responsibility and apply its own medicine to its operations.

The ECB’s funambulist act works through three scenes.

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Acknowledging climate urgency…
And blindly focusing on the short-term focus

According to Christine Lagarde, the ECB is “exploring every area where it could usefully participate in the fight against climate change”. The President ensures that despite the pandemic their work and reflection on the matter has not stopped. In fact, the President rightfully underlines that “the pandemic is a reminder that we need to strengthen the resilience of our society and economies against disruptive exogenous shocks”. This view is shared by many, including lately the French Central Bank.

However, the concrete measures taken by the ECB in response to the Covid crisis are million miles away from these words: banks are getting financed at lower-than-ever rates by depositing even the most polluting assets and the ECB could end up buying up to 132 billion euros in bonds from these companies with its Covid-related asset purchases alone.

Moreover, the ECB and other supervisors greatly eased prudential rules. Such measures are understandable at the peak of the crisis but, should they last, will significantly reduce our resilience to exogenous shocks.

Pretending to support “green”…

And forgetting about the “brown” and fossil fuels

In order to demonstrate its “green” dispositions, Christine Lagarde argues that the new Pandemic Emergency Purchase Program (PEPP) will – like previous corporate asset purchases – drive the ECB to buy green bonds, thus contributing to the ecological transition. Beyond the fact that green bonds are not always green and should be considered with extreme caution, the President’s statement is misleading at best.

The President stresses that the PEPP is “designed in a broad and flexible manner to support its widest possible impact and to avoid distortions of specific market segments”, making a classic “market neutrality” argument. Following the market neutrality principle, the ECB tries to reproduce the structure of the general market and is therefore bound to buy some “green assets”. This does not mean that it really “supports the corporate sector’s increasing efforts to” reduce their carbon footprint. On the contrary, the ECB’s support to “green” activities remains marginal and most of its corporate asset purchases support a high-carbon world.

The ECB’s corporate asset purchases finance 38 fossil fuel companies, including 10 actives in coal and 4 in shale oil and gaz. Several of these companies – like Shell and Total – are planning on greatly increasing their fossil fuel production in the coming years. Overall, 63% of these purchases go to the most polluting firms and activities: the ECB’s corporate portfolio is more carbon intensive than the general market!

Calling on others to act…

And forgetting to do it itself

Christine Lagarde makes it clear that the ECB pushes for a “green recovery” and that the crisis is an opportunity for the EU, Member States and corporations to accelerate and finance the ecological transition. It calls on the EU Commission and Member States to follow the Green Deal and accelerate the sustainable finance strategy.

However, the ECB’s operations are not following the ambition and features of the sustainable finance strategy. In fact, the strategy features a new investment benchmark – the EU Paris-Aligned Benchmark – and a new Ecolabel that will both have fossil fuel exclusions and aim at aligning with a 1.5 or 2°C trajectory. The ECB has no plan to apply such criterion on its operation.

While the ECB often puts forward its work on climate-related risks, progress has been slow to materialize. The ECB is still building knowledge and raising awareness on the topic. No mandatory requirement has been set up or announced to increase resilience and – as the pandemic as shown – the financial system remains highly vulnerable to global shocks. Facing these difficulties, the ECB needs to adopt a precautionary approach that reduces financial flows directed toward the most polluting assets, using the information it already has.

Furthermore, the ECB encourages financial institutions to integrate climate-related risks but hasn’t done anything to do it herself. Climate-related risks are not considered in the ECB’s collateral framework and in its asset purchases. It sends a contradictory signal to the market and contributes to the value of polluting assets.

In addition, the ECB asks banks to disclose climate-related risks and provide higher quality information on their exposure but still refuses to disclose the value of the corporate assets it buys and – even – the list of assets bought under two quantitative easing programs.

Ending the act

The act needs to end. The ECB must stop the hypocrisy of market neutrality and adopt monetary and prudential policies that support European climate objectives and increase the resilience to climate-related risks.

When talking about green bonds, Christine Lagarde herself interprets corporate asset purchases to provide support to a precise sector of the economy. Following this logic, the ECB’s operations are not neutral but have concrete consequences on the market. Consequently, when the ECB buys bonds from fossil fuel companies it supports climate change and global warming and works against European objectives.

It should start by adapting its monetary tools to stop contributing to finance polluting assets and send a clear signal to the market:

  • Corporate asset purchases must be reserved to companies that commit to align with a 1.5°C trajectory and adopt specific fossil fuel phase-out plans.
  • The most polluting assets must be excluded from the ECB’s collateral framework, starting with fossil fuel assets.

The ECB must adopt a precautionary approach to climate-related risks, therefore pushing for financial actors to adopt fossil fuel exclusions and alignment plans with a 1.5°C trajectory:

  • Capital requirements of financial institutions not aligned with a 1.5°C trajectory needs to be raised to reflect climate-related risks, staring with institutions with large exposure to fossil fuels.
  • Once the crisis has passed, “Counter-cyclical cushions” can be increased to reflect the global exposure to high-carbon activities.
  • The ECB’s guidelines and recommendations must include fossil fuel exclusions and the adoption of 1.5°C alignment plans.
  • Banks that have adopted Paris-aligned objectives and annually report on the progress made could benefit from preferential long-term refinancing rates.

Finally, the ECB should lead by example on disclosure by publishing detailed information on its operations, including the individual value of the corporate bonds it holds.

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