A CLIMATE-FRIENDLY PRUDENTIAL
AND MONETARY POLICY

A CLIMATE-FRIENDLY PRUDENTIAL
AND MONETARY POLICY

On the refinancing policy
On the asset purchase policy
About prudential regulation

The ECB’s mandate is to ensure the soundness and stability of the financial system. This will not be possible without adopting measures that allow for the immediate reduction of greenhouse gas emissions in the real economy and, in turn, reduce the exposure of financial institutions to climate risks.

The strategic review of the ECB’s mandate must put an end to a monetary policy that is at odds with Europe an climate objectives and integrate the fight against climate change into the bank’s tasks.

The response by governments and the ECB to the coronavirus crisis demonstrates their ability to react quickly and strongly to external shocks. The current crisis is not an isolated episode but is bound to recur. There is an urgent need to follow the precautionary principle. Instead of managing climate-related risks on their financial returns, financial institutions must prevent impacting the climate in the first place.

Reclaim Finance calls on central bank governors to promote and put in place, notably through the ECB and the NGFS, far-reaching measures to put their monetary and prudential policies in service of the transition towards sustainable, shock-resilient societies.

On the refinancing policy

1. Exclude from the list of collaterals those securities linked to companies developing new fossil energy projects, starting with those developing new projects in the coal and unconventional oil and gas sector which are highly polluting or linked to the opening of new fossil energy reserves. (see list here).

2. Exclude from the list of collaterals those securities linked to companies with high exposure to coal and to unconventional and highly polluting oil and gas. (see list here).

3. Tighten refinancing conditions, with larger haircuts, against securities linked to companies:

a/ that have not committed to adopting absolute emission reduction targets to align with the 1.5°C target and have not committed to moving out of coal by 2030 in EU and OECD countries and by 2040 elsewhere, and ten years later for the oil and gas sectors.

b/ that have not adopted a detailed plan for the closure of their coal assets as early as 2021, and for the oil and gas sectors as early as 2022. These plans must be aligned with the above dates and geographical areas.

4. Commit to adapt the terms of refinancing with larger or lower haircuts according to the sustainability of the assets deposited as collateral, according to the green and brown taxonomy.

5. Make long-term refinancing operations only for banks that have adopted Paris-aligned objectives and annually report on the progress made.

On the asset purchase policy

6. No longer purchase securities linked to companies developing new fossil energy projects, starting with companies developing new projects in the coal and unconventional oil and gas sector which are highly polluting or linked to the opening of new fossil energy reserves. (see list here).

7. No longer purchase securities linked to companies with high exposure to coal and to unconventional and highly polluting oil and gas. (see list here).

8. No longer purchase securities linked to companies that have not committed to absolute emission reduction targets to meet the 1.5°C target and exit from coal by 2030 in EU and OECD countries and by 2040 elsewhere, and for the oil and gas sectors 10 years later.

9. Commit to refrain from buying back shares in companies that have not adopted a detailed plan for the closure of their coal assets as early as 2021, and for the oil and gas sectors as early as 2022. These plans must be aligned with the above dates and geographical areas.

About prudential regulation

10. Adapt banks’ capital requirements according to their exposure and policies for their financial services to fossil fuels by:

a/ increasing the capital requirements for financial institutions that have not adopted a coal exit policy aligned with Paris (as defined here), as early as 2021.

b/ increasing the capital requirements for institutions that have not committed, as early as 2021, to cease providing financial services to companies developing new fossil energy projects, starting with those developing new projects in the coal and unconventional oil and gas sector which are highly polluting or linked to the opening of new fossil energy reserves. (see list here).

c/ committing to adapt capital requirements according to the exposure and financial services to the green and brown taxonomy sectors. This must be in addition to and not instead of the above measures.

11. Strengthen “counter-cyclical cushions” according to banks’ exposure and supervisory policies for their financial services to fossil fuels, in line with the criteria set out in point 10.

12. Require the identification of coal and unconventional oil and gas risks in climate stress testing.

While most of these measures – notably the exclusion measures and alignment with the Paris Agreement – can be put in place immediately, some require establishing green and brown taxonomies as well as increasing transparency and reporting by financial institutions.