ECB wants to do more for Climate Protection
ECB Executive Board member Isabel Schnabel suggests: after corporate bonds, the central bank’s government bonds could also be reallocated according to green criteria.
The European Central Bank (ECB) should take climate measures into account more than before in its mandate: ECB Executive Board member Isabel Schnabel spoke in favor of this on Tuesday at a central bank conference in Stockholm in honor of the retired Riksbank. President Stefan Ingves.
On the other hand, US Federal Reserve Chairman Jerome Powell stressed at the event that the US Federal Reserve (Fed) is not pursuing any climate policy: “Without explicit legislation from Congress, it would be inappropriate for us to use our monetary policy or we are not politicians,” Powell said. Climate – and we won’t be in the future.” Some other central bankers have made similar statements.
Powell has been more conservative on current monetary policy issues. However, he said, “Restoring price stability when inflation is high may require unpopular measures in the short term.”
Schnabel explained that interest rates at the ECB should rise “significantly” and “continuously”: “Inflation will not subside on its own.” However, at the same time, the central bank must make greater efforts to meet the Paris climate goals.
Since October last year, the European Central Bank has been taking climate criteria into account when reinvesting money from maturing corporate bonds. However, these are relatively small amounts.
The central bank has not made any net bond purchases since July, and also wants to start in the spring, at least not fully reinvesting money from maturing bonds. Accordingly, the green parameters “lose part of their effect,” Schnabel noted.
No exception are the climate culprits
Therefore, you should not stop at green reinvestment – but actively reallocate shares.
However, the ECB director is not advocating for the central bank to completely abandon bonds from oil companies, for example, as the environmental protection group Greenpeace recently demanded: “At least initially, we should not completely abandon companies that we have to Dealing with it The green transition is particularly important, but it provides incentives for them to further reduce their emissions.”
However, it should not stick with a greener trend for corporate bond holdings – Schnabel also wants to take a look at the central bank’s large holdings of government bonds.
At the outset of green central bank plans, ECB President Christine Lagarde said that eurozone countries would now not be rated according to greener or less green criteria, and then decisions would be made about government bond purchases.
Schnabel also emphasized that aligning government bond holdings with the Paris climate goals is proving difficult for various reasons: First, government bond buying relies on a capital switch that limits the scope of green standards.
Second, there is still no reliable framework for assessing the compliance of government bond portfolios with the Paris Agreement. And third, there are still relatively few explicit “green” bonds issued by governments.
However, Schnabel proposes two courses of action: one is to increase the proportion of bonds issued by TNEs.
With that, a larger portion of outstanding bonds is already green. A second, complementary option is a gradual rebalancing of the government bond portfolio as governments expand green bond offerings over time.
High rate of green transition
The ECB director disagreed with the assessment that rate hikes fundamentally hindered the green transition. Some have argued that monetary tightening will lead to less investment in renewable energy, and continued dependence on expensive fossil fuels will lead to persistent inflationary pressures – “fossil inflation”.
While this is true: “When interest rates rise, it becomes more expensive to finance investments in green technologies, which carries the risk that higher capital costs will slow the pace of decarbonization,” Schnabel said.
However, the current path of monetary tightening is also the right path for a green transition: “First, the timely restoration of price stability creates the conditions for a green transition to thrive in the long term,” Schnabel said. “And second, the biggest obstacle to rapid decarbonization remains the Lack of progress by governments in implementing previous climate commitments.”