Approaches

Ⓕ The European Central Bank should support the green transition

Reader's digest

• The climate crisis is the biggest challenge of our time. We often hear of the negative role that the financial system plays in aggravating it, and the European Central Bank (ECB) is no exception to this.
• While the EU has adopted an ambitious green transition policy, known as the Green Deal, the ECB today, continues to finance carbon intensive industries through its quantitative easing programmes such as the CSPP.
• One of the reasons for this is that the ECB follows the principle of market neutrality, meaning that it cannot favour one industry over the other when carrying out its policies.
• The approach of the ECB has been criticized for several reasons. One, it means that the ECB continues to finance companies with a high carbon footprint. Two, it perpetuates the financial “market failure” to acknowledge, in the short run, that climate disasters will, in the long run, cause financial losses for sectors and businesses. Third, the ECB’s approach is not in line with the EU’s climate ambitions.
• The debate of the role of the ECB in combating climate change is multi-faceted. While some argue that the ECB should include climate concerns in its quantitative easing policies, others argue that the ECB is already going well beyond its mandate by using these kinds of policies in the first place.

Full explanation

The climate crisis is the biggest challenge of our time. Given the enormous nature of these challenges, it is only given that a systematic approach involving all parts of the economy and society is needed to tackle them. Yet, we often hear that the financial system is not doing enough to help, and that big banks continue to invest in projects involving coal or other fossil fuel exploitation. The economy’s obsession with continuous and expansive growth clashes with the finite nature of the resources on our planet.

There seems to be plenty of money circulating in the world of finance and the European Central Bank (ECB) has been injecting even more of it in response to the Covid-19 crisis. Isn’t there anything the ECB can do to tackle climate change while supporting the economy?

In 2015, the EU ratified the Paris Agreement that aims to limit the global temperature to below 2°C. To implement its commitment, the European Union (EU) launched the European Green Deal, an ambitious green transition programme which aims to reduce greenhouse gas emissions by 55% by 2030 and reach climate neutrality by 2050. The EU also plans to include a sustainable finance strategy, which aims at aligning financial flows with climate objectives.

To comply with this strategy, all public and private financial institutions have to stop investing and subsidising the sectors that are dependent on fossil fuels.

Despite those ambitions, the ECB, today, massively finances carbon intensive industries through its quantitative easing (QE) programmes. Around 250 billion euros from this programme goes to buying debt from private companies, through the so-called Corporate Sector Purchase Programme (CSPP). Several NGOs and think tanks have denounced the fact that 60% of the corporate bonds bought by the ECB were issued by polluting companies.

So why does the ECB subsidise these polluting companies, despite the clear ambitions of the EU to move towards a greener economy? The primary reason is that it follows the principle of “market neutrality”. This means that the ECB tries to replicate the current structure of the financial market when buying bonds. Since 60% of big companies heavily contribute to carbon emissions, so does the ECB’s bond buying programme.

By following a market neutral approach, critics say the ECB perpetuates the “market failure” – that this, the failure of the financial market to take into account, in the short run, the fact that climate disasters will, in the long run, cause financial losses to sectors and companies whose business will suffer most from climate change.  

If we want to switch to a greener economy in line with the EU priorities it is essential to stop subsidising fossil fuels and carbon intensive businesses, and to instead give incentives to banks and investors to lend towards green investments.

But is climate change part of the ECB’s mandate? Views differ on this. Some citizens, experts and politicians argue that the ECB should integrate climate change concerns when carrying out its monetary policies. Others argue that the ECB is already going well beyond its primary mandate of maintaining price stability and pursuing other objectives than price stability would unavoidably push the ECB beyond the limits of its mandate.

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Start the debate

The financial system is currently aggravating climate change by continuing to finance polluting activities. The European Central Bank (ECB) currently contributes to this mis-alignement by following a "market neutral" approach whereby it supports the economy without any environmental criteria. This in turns allows fossil fuel intensive industries to free ride on the ECB’s policies. Rather, the ECB should take a proactive stance on climate change, by encouraging investments contributing to the transition to a low carbon economy.

Want to dig even deeper in this debate? Click on any of the links to discover concrete ideas for the future of the ECB, or join the debate and contribute your own ideas.

→ #2 Decrease or stop quantitative easing

→ #3 ECB should “green” its quantitative easing programme

→ #4 Promote fair and sustainable lending by banks

→ #5 Support green investment by public banks via quantitative easing