ECB to consider climate and nature in monetary policy

The European Central Bank (ECB) is committed to considering the implications of climate change and nature degradation in its monetary policy, the central bank said in its latest monetary policy strategy.

Although the ECB notes that governments have the tools and responsibility to address climate change, its mandate includes assessing both climate change and climate degradation since it could affect financial stability.

The ECB said it will adapt its tools and market operations in relation to disclosures, risk assessment, corporate sector asset purchases, and its collateral framework. In addition, the central bank aims “to incorporate climate-related considerations into the structural monetary policy operations to be introduced at a later stage”.

Jens van’ t Klooster, a political economy professor at the University of Amsterdam, believes this means the central bank may be looking at green dual interest rates in the near future as the statement mentions wanting to look into the benefits and side effects of monetary policy measures.

Dual interest rates allow central banks to offer lower rates to encourage banks to lend to specific sectors. Some NGOs and economists have encouraged the ECB to introduce a lower rate for green energy projects.

“Higher interest rates make it more difficult to fund clean energy investments. High interest rates also make it more difficult for governments to spend on climate and environmental objectives,” said van’ t Klooster.

He said the ECB assumes that interest rates are the only way to fight inflation, “but it is an instrument that is not always effective and has many undesirable side effects”.

An ECB spokesperson said the central bank has not yet looked into green interest rates but is committed to incorporating climate change into its operational framework and “no instruments are off the table”.

Yannis Dafermos, a professor at the Soas University of London, said the focus continues to be on single materiality of risk or the financial impact of climate change on banks, rather than the potential impact their operations could have, also known as double materiality.

He sees the addition of nature degradation in the ECB’s strategy as an excuse to do more research instead of taking action.

“From a single materiality perspective, the ECB and perhaps some other banks in the global north care more about the effects on inflation, but I don’t think that this is going to lead to any significant changes,” he said.

Dafermos is not convinced the ECB will consider green interest rates as it has never publicly committed such a move, only that it might be something that would be looked into. Instead, the central bank is focused on risk exposure which according to Dafermos is also important but he also sees a need to examine how the financial sector can contribute to a net zero economy.

Dafermos believes there is still space for the ECB to decarbonise its corporate bond portfolio further as well as support green sovereign bonds. The bank can also reduce interest rates for green projects while increasing rates for banks investing in fossil fuels.