Published on 16 July 2021


The ECB seeks to incorporate climate change into its monetary policy

The European Central Bank unveiled its new monetary policy, with climate change playing a key role in its strategy. Two months ahead of schedule, European Central Bank President Christine Lagarde unveiled a detailed action plan that considers climate risk in macroeconomic modelling and risk assessments.

Banque centrale europenne Christine Lagarde Martin Lamberts ECB


What a remarkable turn of events! Only two days after the European Commission published its new strategy on sustainable finance, the European Central Bank (ECB) followed suit by unveiling a new action plan which highlights consideration of climate change risks. This unexpected move was spearheaded by Christine Lagarde, President of the ECB, who has been conducting a strategic review for 18 months. This was the first policy review for the ECB since 2003, with results due to be revealed in September after approval by the member states’ central bank governors. Yet, the ECB action plan arrived two months ahead of schedule, with Lagarde stating during the strategy presentation that “everyone complains that Europe is always late. Well, the ECB is early”.

Was it the climate emergency that pushed governors to quickly come to an agreement? Strong supporters of fiscal restraint and those in support of market neutrality have come to embrace the idea of integrating climate change into the ECB’s monetary policy. "Climate change is at the heart of our strategy," insists Lagarde. Governors voted unanimously on the new strategy, with Lagarde stating that “these are not just words. It's not a speech; it's a commitment of the entire Governing Council with delivery time, deliverables and pursuit of objectives”.

Of priority in its decision-making tools is that the ECB fully integrates the effects of climate change. Its macroeconomic models will gradually take climate change into account, to study its effects on the real economy. The ECB will also set up new indicators to analyze climate-related risks linked to financial institutions, using data provided by the Sustainable Financial Disclosure Regulation (SFDR), green financial products, institutional carbon footprints, and their physical risk exposures.

ESG reporting as a requirement for asset purchases

Businesses will also have to demonstrate their green engagements when issuing bonds. The ECB wants to impose reporting obligations as a requirement for eligibility as collateral and asset purchases. These reporting obligations will take into account European regulations such as the SFDR and the Corporate Sustainability Reporting Directive (CSRD).

"This reporting may include the transition plans many companies will be putting together", added Lagarde, and this part of the action plan will be detailed in 2022. Company asset purchase policies will now also consider the risks associated with climate change when making decisions, which seems to constitute a break from its principle of market neutrality.

Lastly, in line with what the European Commission announced in its new strategy for sustainable finance, the ECB plans to introduce climate stress tests for Eurozone financial institutions. Central banks and members of the Network for Greening the Financial System (NGFS) - of which the ECB is a member - have been working for many months on developing scenarios to test banks and insurance companies based on the long-term risk posed by climate change. The French Prudential Supervision and Resolution Authority (ACPR) has done the hard work by carrying out the first climate stress test in France.

Arnaud Dumas

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