According to a statement released on Monday, the ECB will reinvest “the sizeable redemptions expected over the coming years” in a manner that penalizes businesses with a significant carbon footprint. The new strategy will have an impact on reinvestments totaling about 30 billion euros ($31.3 billion) annually, or roughly 10% of the ECB’s corporate portfolio, according to Executive Board member Isabel Schnabel.
“This makes a difference,” she said, “if you compare it to other central banks, this is a substantial amount.”
In response to growing concern that there is not enough time to address the threat posed by global warming, the ECB is making changes to a key component of its toolkit. According to estimates from the United Nations Intergovernmental Panel on Climate Change, the planet may be headed for temperature increases that could double the limit specified in the Paris climate agreement.
Environmental activists have repeatedly criticized the ECB for its investments in carbon-intensive firms like Shell Plc, Eni SpA, and TotalEnergies SE.
In the statement, ECB President Christine Lagarde said, “With these decisions, we are putting our commitment to combating climate change into real action.” “Within the scope of our authority, we are taking additional proactive measures to integrate climate change into our monetary policy operations. There will also be additional steps taken to align our initiatives with the objectives of the Paris Agreement as part of our evolving climate agenda.
Goals of Monetary Policy
The extent to which monetary policy should be altered in order to support the fight against climate change is a topic of discussion at the same time. The amount of corporate bond purchases will “continue to be determined solely by monetary policy considerations and their role in achieving the ECB’s inflation target,” the European Central Bank (ECB)) stated in a statement on Monday.
Additionally, decision-makers were eager to demonstrate that the ECB’s planned “tilt” in its bond holdings will be a gradual process for the affected issuers.
According to Schnabel, “We want to give all those companies an incentive to become greener and, as a result, to ensure that over time they remain part of these portfolios.” There is a clear hierarchy, she continued, so “climate change considerations cannot stand in the way of our monetary policy needs.”
Professor of macro-finance and economics at UWE Bristol, Daniela Gabor, stated on Twitter that the ECB’s climate plans are a significant step.
The ECB is now in the business of penalizing carbon financiers, according to the new collateral rules, which are by far the most ambitious in the world of central banking, she wrote.
The initiatives are the end result of a year-long effort to design specific steps for incorporating climate-change considerations into the central bank’s monetary policy. When they revealed the findings of their comprehensive strategy review, which also included a modification to the ECB’s inflation target, officials had promised to begin work on a detailed plan in July of last year.
Separately, the European Central Bank (ECB) has also conducted a “climate stress test” among commercial banks, which is expected to show that lenders are still ill-prepared to assess how significantly global warming will affect their balance sheets. The results of the test will be released on July 8; however, according to Andrea Enria, who chairs the ECB’s supervisory board, the results won’t be broken out by individual banks.