FRANKFURT: Christine Lagarde has called the fight against climate change “mission critical” for the European Central Bank but she will struggle to match those words with actions during her eight years leading Europe’s most powerful financial institution.
While the ECB will be able to use its platform to highlight the financial risks associated with climate change, its narrowly defined mandate of fighting inflation will limit what Lagarde can actually do.
“It’s fashionable to include climate change in the discussion but right now it’s much ado about nothing,” said Angel Talavera, an economist at Oxford Economics. “There’s not a lot the ECB can do. Climate change isn’t really part of the ECB’s mandate.”
Central banks have come under growing pressure to do their part in fighting climate change and pioneers like Bank of England chief Mark Carney — soon taking up a UN climate finance job — have spoken up about it for years.
They fear extreme weather events could lead to large fluctuations in economic growth and result in food price surges as crops are wiped out. It could also pose a systemic risk to the financial system through banks’ exposure to sectors like coal, which may be rendered less viable by policies needed to tackle climate change.
While Federal Reserve chief Jerome Powell said dealing with climate change was not a job for the US central bank, Lagarde confirmed to the European Parliament this week that it would be part of an ECB policy review. But she cooled expectations of major change by presenting a narrow list of options to discuss.
The ECB, already buying up 20 billion euros worth of debt each month to lower borrowing costs and generate inflation, could use its financial firepower to buy more “green” assets, some argue.
But abandoning the principle of market neutrality may be seen as too risky for the ECB’s unelected technocrats, calling into question the bank’s independence and opening it up to political attacks that could undermine its monetary policy.
The ECB could be given an explicit political mandate to fight climate change but that would require a revision of the European Union Treaty — a notoriously difficult process that would need consent from all 28 EU countries and which appears to be deeply unpopular among central bankers. “I actually think that the mandate as is does a good job so I would not start a discussion about changing the mandate,” said Isabel Schnabel, Germany’s next representative on the ECB board.
Bundesbank President Jens Weidmann and Italian central bank chief Ignazio Visco, normally at opposing ends in ECB policy debates, have both publicly argued that fighting climate change is a task for elected politicians.
The bank has some leeway to act under the EU Treaty, which calls on it to “support” the bloc’s general economic policies provided there is no clash with its inflation mandate.
If credit rating agencies factored climate risk into their assessment, the ECB could differentiate between assets without giving up on market neutrality.
But even then, the pool of green assets is limited and the criteria for inclusion is poorly defined. If the ECB overbought a particular sector, that would raise the price of assets and lead to accusations it was providing a direct subsidy.
Lagarde suggested the ECB could force banks to factor climate impacts into their risk assessments, which could require them to build bigger buffers for investments in polluting sectors. But European accounting rules mean it is not currently possible to require bigger provision on a loan to an oil firm than to a wind-turbine maker.
The ECB could also apply a larger haircut on polluting assets offered as collateral in its market operations, Stanislas Jourdan of lobby group Positive Money Europe said after meeting Lagarde this week.
“We want to look at the role of the collateral framework and how climate risk should be included in that,” he said. “Part of the problem is that the ECB relies so much on credit ratings, and credit ratings don’t incorporate climate risk.” The ECB plans to incorporate climate risks into its economic analysis although its “one size fits all” monetary policy means any decisions based on that could sow division between Eurozone countries whose approach to the issue varies.
Lagarde has also argued that the ECB’s pension fund could differentiate between green and other assets, but that move would be largely symbolic.
The ECB’s first major policy review since 2003 could herald the inclusion of climate change goals but probably only where they do not take focus away from its legal mandate.
“There may be some clarifications, maybe some small changes,” Schnabel said of the review.
“Probably the biggest issue will be how can we integrate other objectives, and the most important one will be climate change — how can we do so without endangering the mandate and endangering independence.”