Currently, the central bank is doing its best to counteract the economic consequences of the Corona crisis. But is this perhaps only the prelude to a much greater effort that still lies ahead of us all globally?
Climate change is threatening our planet and the effects are already visible: no one will be spared from climate change. Extreme weather events such as droughts or high temperatures, pandemics, the loss of biodiversity and species diversity and much more will not pass our economy by unsparingly. Extreme weather affects agricultural prices and yields.
ECB focuses on climate protection
The ECB’s central task is to ensure price stability in the euro area. But it now also sees it as its task to promote climate protection in a targeted manner and to combine it with price stability. Even before her move to the top of the central bank, the head, Christine Lagarde, had proclaimed that climate change and environmental protection should be the focus for the institution. But the ECB’s actions have been the subject of controversy ever since.
While actors in the environmental and ecological movement accuse the ECB of not pursuing this goal consistently (as long as the ECB supports industries that have a negative impact on the climate with its bond purchase programmes), others argue that the ECB should concentrate on its central task and not on environmental policy in addition. Other institutions were responsible for this.
Controversial discussion set in motion
This is an incomprehensible position, since both climate change and the measures to combat it affect central banks in several ways:
The primary objective of maintaining price stability will become even more complex or difficult as global warming increases. Both climate policy and climate change mitigation will affect key macroeconomic variables of a central bank. It is crucial for central banks to understand such effects and their implications for monetary policy. Moreover, climate change and related measures give rise to various financial risks that can damage the entire financial system.
ECB has instruments at its disposal for green monetary policy
One of these is that the ECB will in future take climate risks into account in its bond-buying programmes for states and companies – thus meeting the demands of climate protectionists. In this way, the ECB can channel money into sustainable sectors while excluding capital flows into, say, fossil fuel industries. More than 60 percent of the corporate bonds purchased by the ECB still have a negative impact on climate change.
At present, the ECB is buying less corporate bonds and more government bonds. Problem: In the case of government bonds, Lagarde said, it is up to governments to decide how much they want to comply with the Paris climate agreement. Here the ECB has no influence on the use of the funds.
How effective are green bonds on the climate?
To be clear – neither the effectiveness of the instruments nor the impact of climate risks on price stability have been scientifically proven.
So far, the ECB has bought bonds that reflect the cross-section of the market, so that it does not trigger any distortions in the market with its purchases and remains market neutral. With a focus on green bonds, market neutrality is no longer a given. The increased purchase of green bonds leads to a rise in prices and a possible fall in the price of “non-green” bonds. So if buying green bonds now causes investors to focus on the cheap deals, we have gained nothing.
Don’t criticize, do!
But stop! What are we waiting for? Instead of supporting the ECB’s efforts to move capital into sustainable capital flows, resentment and criticism are spreading. The drama of climate change is such that it is not just the ECB that needs to take action – it is all of us. More capital in the private as well as in the business sector can be one of our last possibilities to successfully master the ecological transformation of the economy.
If the ECB includes climate-related financial risks in its financial models, why should it neglect climate-related aspects when buying bonds? The ECB must take sustainable criteria into account in its bond-buying programme. If the ECB is currently predominantly promoting an unsustainable economy with its corporate bonds and cannot ensure that the money is used sustainably when it buys government bonds, it is justified that the flags at the ECB are also flying green.
“The ECB must consider sustainable criteria in its bond-buying program.”
The ECB would send a signal that it is time for everyone to act. We need a hands-on mentality in which every institution acts and makes a positive contribution. After all, without stronger measures to combat climate change, the costs of the impacts in Germany alone could total nearly 800 billion euros by 2050, according to the DIW. An emergency bond purchase program like Corona’s is not appropriate for this.
