As Europe burns, can the ECB turn words into action on green policy?

On Monday, as Europe was under the deathly grip of another record-breaking heatwave, the European Central Bank (ECB) published the outcome of its five-yearly monetary policy strategy review.

Paragraph 10 of the ECB’s updated strategy statement includes the following sentence:

“Within its mandate, the Governing Council [of the ECB] is committed to ensuring that the Eurosystem fully takes into account, in line with the EU’s goals and objectives, the implications of climate change and nature degradation for monetary policy and central banking.”

Given the widespread extent of political inaction and even opposition to climate policy, it’s heartening to see the ECB backing the global scientific consensus on climate change. While the language is largely a repeat from the previous 2021 strategy statement, the inclusion of ​“nature degradation” is new, demonstrating that the ECB has taken note of the alarming findings of research into ecosystem collapse.

But actions speak louder than words, and the ECB has a mixed track record when it comes to climate action. In the 2024 Green Central Banking Scorecard, the ECB ranked fourth out of twenty, but with a meagre rating of 87 out of 130, its policies are only among the best of a bad bunch.

The ECB’s 2021 climate plan, a result of its previous strategy review, had two key policy measures — one of which has since been rendered largely redundant, the other of which never happened.

Firstly, the ECB has amassed a €264bn corporate bond portfolio (the collection of business investments purchased) between 2016 – 2022. This portfolio was criticised for having a bias that favoured environmentally harmful companies. To resolve this, a green tilting policy was introduced where bonds were given a ​“climate score.” When the ECB made new purchases, it would buy more bonds with higher scores, and fewer bonds with lower scores, thereby shifting the overall portfolio away from dirty companies and towards green ones. However, amidst the high inflation after Russia’s invasion of Ukraine, in July 2023 the ECB stopped buying new corporate bonds altogether, meaning that the ​“green tilting” has since had no direct effect. Meanwhile, the ECB continues to hold lots of bonds from high-polluting companies. The ECB did suggest in June that it might in future continue with a small amount of proactive tilting of the existing portfolio, but the suggested target is too gradual for this to have a major impact.

Secondly, similar to the bond portfolio, the current collateral framework of the ECB also has an inherent carbon bias. This means that, of the financial assets that are eligible to be used as collateral when banks want to borrow money from the ECB, a high proportion are bonds from high-polluting companies. This makes it cheaper for dirty companies to borrow money, because the investors know that they can then use these investments as collateral with the ECB. Reforming the collateral framework requires removing this carbon bias by implementing a penalty or exclusion against dirty financial assets, and potentially a bonus for green assets. In July 2022 the ECB announced that new limits would be introduced on the proportion of high-carbon assets that financial institutions could use as collateral. Yet in July 2024 the governing council decided not to proceed with this approach, and an alternative method has not yet been announced.

At the same time, the ECB’s interest rate policy has been actively undermining the green transition, by making it more expensive to invest in green technologies. In particular, this has harmed the renewable energy industry, where projects are often financed with large up-front borrowing and so are highly sensitive to interest rates. There is a self-defeating irony to this: the ECB’s high interest rates are a reaction to high inflation, yet they are undermining the very clean energy investments that would make the eurozone more resilient to fossil fuel price shocks. Soaring gas prices after Russia’s invasion were a predominant cause of the recent huge spike in inflation, and the war between Israel and Iran reminds us that the next ​“fossilflation” crisis could be just around the corner.

With deathly heatwaves and fossil fuel price shocks present in everyone’s minds, now is the time for the ECB to convert words to actions. This is why, in a manifesto jointly signed by over 40 NGOS, we called for the ECB to implement the following three policies:

• Introduce green targeted longer-term refinancing operations to provide lower interest rates for clean energy investments (also known as a ​“green interest rate” or ​“dual rates”).

• Reform the collateral framework to penalise dirty assets and favour green ones, including the complete exclusion of companies engaged in practices defined as ​“always environmentally harmful”, such as fossil fuel expansion.

• Apply green tilting to the assets that are already part of the corporate bond portfolio, including complete exclusions for highly unsustainable companies – this means actively selling off its dirty assets, not just waiting for them to mature.

By introducing these measures, the ECB would move from a position of hindering the green transition towards playing a major supportive role. Not only that, but it would become more effective at its primary mandate of controlling inflation, by reducing the eurozone’s dependence on imported fossil fuels and supporting the environmental stability upon which the stability of the financial system relies.

The strategy review is written, now it’s time for action.

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