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The ECB’s current position is unenviable. While trying to contain eurozone fragmentation, it is also expected to stare down inflation, despite having a very limited influence on both problems.
However, crises have the unfortunate propensity to not wait until it’s their turn to be dealt with – and the threat of climate change demands attention as it looms large.
“Within our mandate, we are taking further concrete steps to incorporate climate change into our monetary policy operations,” ECB president Christine Lagarde said in a press statement released on Monday (4 July).
More specifically, the ECB decided to include climate considerations in its corporate bond holdings, in the assets it holds as collateral, and in the way it assesses risk.
Concerning the corporate bond holdings, the watchdog of the common currency announced it would “tilt” the bonds it holds on its balance sheet from highly polluting companies to companies with better climate performance. The ECB and the national central banks of the eurosystem plan to do this through the reinvestment of the corporate bonds that are due in the coming months and years, starting from October 2022.
The ECB sees another point of leverage in the collateral that financial institutions have to put up when they get money from the central bank. In future, there will be limits on the share of assets issued by companies with a high carbon footprint that can be pledged by counterparties.
This move is aimed at reducing climate-related financial risks, for example by preventing a sudden fall in asset prices due to stranded assets that would undermine the stability of the eurosystem.
Moreover, the central banks will only accept collateral from companies and debtors that comply with the EU’s Corporate Sustainability Reporting Directive (CSRD) starting from 2026. The ECB hopes that this requirement will incentivise companies to comply with EU rules.
Finally, the ECB wants to strengthen its capabilities to assess climate-related issues, stating that “despite the progress already achieved by rating agencies, current disclosure standards are not yet satisfactory.”
While the ECB is the first major central bank to take such climate-related steps, it stresses that “the measures are in full accordance with the eurosystem’s primary objective of maintaining price stability.”