DWS KGaA Investor Relations Media Career Belgium Insights Capabilities Solutions Service Profile Search Home » Insights » CIO View » Macro » ECB: Climate protection to be given a BIG boost Oct 14, 2021 Sustainability ECB: Climate protection to be given a BIG boost A green presidency for Christine Lagarde Ulrike Kastens Senior Economist Europe 14 min to read Sooner than expected the European Central Bank (ECB) presented the results of its monetary policy strategy review on July 8, 2021. In addition to adopting a new target of 2%, rather than its previous "below but close to 2%," the ECB has made an effort to integrate the consequences of climate change into its policy-making – whether monetary policy or financial supervision. In doing so the central bank has confirmed the stance that has emerged from speeches and essays by many members of the Governing Council since the beginning of Christine Lagarde’s ECB presidency. As a major central bank, it is thus sending a signal to also support the EU in its goal of becoming climate neutral by 2050. Even if combating the consequences of climate change is primarily the task of national governments, the Eurozone's central bankers do not want to be idle observers. Nor should they be. The issue is too urgent. The more that governments and other institutions pull together and build up some traction, the sooner results can be expected. Treaty on the Functioning of the European Union (TFEU) The ECB emphasizes that it is acting within its mandate. In its opinion the consequences of climate change and the EU's transition to climate neutrality will affect growth and inflation not only in the short term, but also the long term and thus will also have a long-term impact on the . The central bank writes, "Climate change and the transition towards a more sustainable economy affect the outlook for price stability through their impact on macroeconomic indicators such as inflation, output, employment, interest rates, investment and productivity; ; and the transmission of monetary policy."[1] And climate change and the transition to a low carbon economy may also affect the value and risk profile of the ECB’s balance sheet, leading to a potentially undesirable accumulation of climate-related financial risks. Against this background, the ECB sees the inclusion of climate change impacts as being justified by its mandate, as formulated in the EU Treaties: To provide price stability under Article 127.1 in the Treaty on the Functioning of the European Union (TFEU), to support economic development in the monetary union downstream under Article 127.3, and to ensure sustainable economic development under Article 3. But in our opinion this argument does not apply to the issue of climate protection. Not including climate risks as a factor in monetary policymaking is not a solution. If risks to financial market stability emerge due to the environment, natural disasters or global warming, they must be addressed. This is in the interest of investors, financial institutions and financial supervision, which is one of the ECB's responsibilities. Therefore, the ECB's desire to involve the climate in its calculations looks reasonable and logical.[1] Don’t just blame CO2 for higher power prices While some blame the European carbon-price mechanism for surging power prices, the answer is much more straightforward: cyclical fluctuations of natural-gas prices. Read more Another question is the issuance of green long-term targeted tenders (TLTROs). Long-term tenders provide banks with liquidity for three to four years in order to stimulate lending to companies and private households. A one-sided preference for banks that have a stronger focus on loans for sustainable or green projects would violate the principle of equal treatment. In addition, these long-term tenders, which are special repurchase agreements, often have to be issued in economically difficult times (i.e., recessions) in order to ensure there is sufficient for the banking sector and to prevent a credit crunch. In the research paper published by the ECB in connection with the strategy review, the authors do not directly rule out these green long-term tenders. However, the authors explicitly point out that such operations must be tied to proper definitions of the green criteria. This is currently still "pie in the sky" as constant definitions of those criteria are not available, yet. It is conceivable that in the longer term green long-term tenders could be offered as an additional source of liquidity supply, but without impairing the basic supply of the entire banking system and thus financial stability. 123 More topics Nov 26, 2021 Politics Forming a new government was the easy bit Climate protection, digitalization and pragmatism Nov 26, 2021 Equities CIO VIEW QUARTERLY NEWS- LETTER 1. https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html 2. 3. 4. 5. https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210303_1~f3df48854e.en.html 6. https://www.unglobalcompact.org/what-is-gc/mission/principles 7. 8. Isabel Schnabel 14.06.2021: From market neutrality to market efficiency. Source: ECB 9. 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