CHARTING THE PATH FOR GREEN CENTRAL BANKING
CENTRAL BANKS’ ROLE IN PROTECTING THE ENVIRONMENT
With an additional €620 billion a year needing to be spent in Europe until 2030 to reach climate targets, all financial institutions should be reflecting on what they can do to support this goal. As key players in the financial sector, central banks also have a role to play. When regulating the money supply and overseeing banks’ activities, they impact purchasing power, debt, and financial stability.
Central banks must play their part in greening the financial sector. Not simply because they have a moral responsibility to do so, but because they are required to do so by their mandates. Indeed, climate change and fossil fuel dependence significantly impact price stability.
CLIMATE CHANGE AND THE EUROPEAN CENTRAL BANK
The European Central Bank (ECB) works with the 20 national central banks of the Eurosystem to ensure price stability. The ECB also needs to support the European Union’s (EU) policies, including its climate goals, as long as it doesn’t interfere with price stability.
In 2021, the ECB adopted its first climate-related measures. However, it is yet to align all of its operations with EU climate goals. To do so, it must both end support for companies at odds with the transition – notably by excluding fossil fuel developers from its collateral and asset purchases – and implement measures to contribute to the bloc’s transition by incentivizing green investments.
STOP SUPPORTING BIG POLLUTERS
The ECB currently supports high emitting companies, including fossil fuel developers, through various channels. This is notably because of the prevailing focus on short-term financial risks over climate impact and overlooking negative consequences of economic activities.
When the ECB decides which assets are eligible as guarantees against credit for commercial banks (known as ‘collateral’) and under what conditions, it has a bias in favor of polluters. Indeed, some fossil fuel company assets are considered low risk and therefore enable banks to access more liquidity than greener assets.
While the ECB previously seemed committed to addressing this issue, its failure to implement the once-promised measures casts doubt on its willingness to act. The ECB should exclude assets linked to high emitting companies and integrate the climate impact of the company when valuing eligible assets.
More on the Eurosystem collateral framework.
In 2022, the ECB announced a policy to favor companies with better climate performance when purchasing assets (‘tilting’ policy). Not only did this policy fail to filter out fossil fuel developers, but it also became irrelevant in mid-2023 with the end of quantitative easing and reinvestment.
Rather than waiting for monetary portfolios to naturally decrease, the ECB must actively rid itself of assets linked to companies developing fossil fuel projects. When the ECB resumes asset purchasing, it should avoid fossil fuel assets and give preference to assets from sustainable companies.
More on the ECB’s decarbonization strategy.
CONTRIBUTING TO THE GREEN TRANSITION
Aside from cutting its support to big polluters, the ECB should also be striving to actively contribute to the EU transition. The ECB could achieve this by relying on its main policy tool: setting interest rates. Interest rates affect the entire economy, impacting the cost of credit for individuals, companies and governments. As such, they influence our ability to finance a sustainable energy transition.
With the return of high inflation in 2021, the ECB increased its interest rates to levels unseen for decades. While rates are now falling, they remain high, making the EU green transition more expensive. As a result, they are dis-incentivizing investment in climate solutions like renewables and building renovation. This could contradict the ECB’s own mandate because climate change and our reliance on fossil fuels make prices more volatile, potentially driving up inflation, while also increasing the risk of financial instability.
Differentiated interest rates could provide a solution by allowing the bank to fight inflation in the short term whilst financing the much-needed energy and ecological transition in the longer term.
More on dual rates.
What do experts and civil society organizations say about this?
In January 2025, 60+ civil society organizations and experts wrote an open letter to the European Central Bank Governing Council, its decision-making body. They called for the monetary policy strategy review to introduce measures to green monetary policy.
The measures recommended by this coalition are detailed in a manifesto signed by 41 civil society organizations.