European Central Bank sets up climate team, considers green bonds
28 January 2021 | Markets
Climate change will be key to the review of the European Central Bank’s policy, its president, Christine Lagarde, announced on Monday (25 January), marking a shift towards ‘greener’ monetary policy.
That includes creating a small team to set the European Central Bank (ECB) agenda on climate-related topics and lead its efforts to help transition to a greener economy in the eurozone.
“Climate change affects all of our policy areas,” said Lagarde. “The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves.”
The bank will also invest in the Bank for International Settlements’ green bond fund, which invests in renewable energy production, energy efficiency and other environmentally friendly projects, and will consider future investments in green bonds.
Since she took the helm of the ECB just over a year ago, Lagarde has made the environment a priority in the bank’s policies, including climate considerations in its work as the eurozone’s banking watchdog and main financial institution.
While critics have said climate protection would be “a distraction” from the ECB’s mandate to ensure price stability, Lagarde said on Monday that climate change belongs in the ECB’s remit because it could affect inflation and obstruct the flow of credit to the economy.
“Climate change can create short-term volatility in output and inflation through extreme weather events, and if left unaddressed can have long-lasting effects on growth and inflation,” she added.
The ECB also said on Monday it would invest some of its own funds, which total €20.8 billion and include capital paid by eurozone countries, reserves and provisions, in a green bond fund run by the Bank for International Settlement.
More significantly, ECB policymakers are also debating what role climate considerations should play in the institution’s multi-trillion euro bond-buying programme.
The announcement comes less than a week after the European Investment Bank President, Werner Hoyer, announced that Europe needs to acknowledge that its future is no longer with fossil fuels and emphasised the success of green bonds.
So far the ECB has bought corporate bonds based on their outstanding amounts but Lagarde has said the bank might have to consider a more active approach to correct the market’s failure to price in climate risk.
“Our strategy review enables us to consider more deeply how we can continue to protect our mandate in the face of (climate) risks and, at the same time, strengthen the resilience of monetary policy and our balance sheet,” Lagarde said.