ECB to Factor Climate Risk into Monetary Policy Operations
The Governing Council of the European Central Bank (ECB) has decided to take further steps to include climate change considerations in the Eurosystem’s monetary policy framework. The new measures will account for climate change in its corporate bond purchases, collateral framework, disclosure requirements and risk management, in line with its climate action plan
The measures aim to better take into account climate-related financial risk in the Eurosystem balance sheet and support the green transition of the economy in line with the EU’s climate neutrality objectives. Measures will also provide incentives to companies and financial institutions to be more transparent about their carbon emissions and to reduce them.
European Central Bank President Christine Lagarde said in a statement that the measures announced today are part of a larger plan that will involve further steps to align climate change with monetary policy and more measures will follow.
She said, “With these decisions we are turning our commitment to fighting climate change into real action. Within our mandate, we are taking further concrete steps to incorporate climate change into our monetary policy operations. And, as part of our evolving climate agenda, there will be more steps to align our activities with the goals of the Paris Agreement.”
The measures include:
Corporate bond holdings: The Eurosystem aims to gradually decarbonise its corporate bond holdings, on a path aligned with the goals of the Paris Agreement.
Collateral framework: The Eurosystem will limit the share of assets issued by entities with a high carbon footprint that can be pledged as collateral by individual counterparties when borrowing from the Eurosystem.
Climate-related disclosure requirements for collateral: The Eurosystem will only accept marketable assets and credit claims from companies and debtors that comply with the Corporate Sustainability Reporting Directive (CSRD) as collateral in Eurosystem credit operations once the directive is fully implemented.
Risk assessment and management: The Eurosystem will further enhance its risk assessment tools and capabilities to better include climate-related risks.
The ECB expects the measures to apply from October 2022 and will start publishing climate-related information on corporate bond holdings regularly as of the first quarter of 2023.
Additionally, the Eurosystem will, as of this year, consider climate change risks when reviewing haircuts applied to corporate bonds used as collateral. Haircuts are reductions applied to the value of collateral based on its riskiness.
The ECB is also including climate change considerations in areas of its work besides monetary policy, including banking supervision, financial stability, economic analysis, statistical data and corporate sustainability. In its statement the ECB said the aim of this commitment is to make a real difference by managing and mitigating the financial risk of climate change and assessing its economic impact, by promoting sustainable finance to support an orderly transition towards a low-carbon economy and by sharing expertise to help foster wider changes in economic behaviour.