Why is ECB market neutrality a political issue?
When she took office, Christine Lagarde assured that she would green the ECB and align her activities with the Paris Agreement. Under her leadership, debate emerged as to whether the ECB should play a role in supporting the European Union’s climate and environment objectives and how it should do so.
Christine Lagarde also announced more recently that climate change is a threat to financial stability and that the ECB, in its strategic review scheduled for September 2021, should respond. One of the avenues mentioned - and supported by many civil society actors - is departure from the strict principle of market neutrality, which implies that the ECB does not discriminate against a specific sector, even considering the risk that climate change poses to some.
This has ruffled some feathers amongst Member States - most notably Germany - where climate change is still believed to be a governmental task, not one for the ECB. Like Lagarde, I believe that helping to reduce climate risk also contributes to financial stability. What’s taken place is a doctrinal battle.
What would be the practical implications of the ECB’s intervention in favor of compliance with the Paris Agreement, and for which sectors?
By respecting the principle of market neutrality, the ECB automatically contributes to climate change. In practice, the ECB currently implements the principle of market neutrality by purchasing corporate bonds in the same proportion as their market share in the listed sector. This ultimately leads to investing more in polluting sectors since the listed sectors (energy, transport, etc.) are the most carbon-emitting.
Moving away from this principle - which is not a legal obligation for the ECB, but a well-established practice - would give the ECB the means to gradually reduce the purchase of financial securities from sectors that threaten the environment and the fight against climate change. To define which sectors should be covered, the ECB could use the EU Taxonomy with the new European depository which differentiates between green and ecological transition activities and those that are not. If the ECB introduces this "climate filter" it will necessarily increase the risks associated with holding "anti-climate" securities since it will be more difficult for a bank to file this security on deposit to the ECB, for example. This will reduce the liquidity of this financial security, and in turn, increase its risk and cost.
What is most powerful in terms of redirecting financial flows: climate action by the ECB or the European Commission’s action plan on sustainable finance?
Both, of course. The Commission’s new action plan on sustainable finance should make it possible to deploy a favorable legislative framework at the European level to mobilize massive financial flows in favor of technologies and solutions enabling the transition to achieve European climate and environmental objectives. The new action plan will be multidimensional, taking into account public finances, the financial sector, institutions such as the European Investment Bank (EIB) or the ECB, as well as the very underestimated potential of green savings to finance the fight against climate change. The ECB will therefore be one of the key players in the implementation of this new strategy.
And the ECB has not hesitated because it announced in November 2020 that all banks in the eurozone will have to stress test their exposure to climate risk by 2022. This will seriously accelerate the understanding of climate risk and will put pressure on banks because currently, only 3% do it correctly.
Interview by Anne-Catherine Husson Traore