The supervisory climate stress test will be based on the ECB’s comprehensive “Guide on climate-related and environmental risks”. 28. The operationalisation of this principle entails the ECB purchasing securities in proportion to their relative market capitalisation. The market neutrality principle was first mentioned by Benoît Cœuré, former Member of the Executive Board of the ECB, in 2015. See Cœuré, B. (2015), “Embarking on public sector asset purchases”, 10 March. 29. For example, the Bank of England’s Corporate Bond Purchase Scheme (CBPS) follows a principle similar to market neutrality. The CBPS is conducted with the objective of minimizing the impact of asset purchases on the relative borrowing costs across sectors. The principle is implemented via sector key targets, with the potential for deviations. Similarly, market neutrality is a principle guiding the Bank of Japan’s and Bank of Canada’s purchase programmes. For example, see Bank of Canada (2021), “Statement of Policy Governing the Acquisition and Management of Financial Assets for the Bank of Canada’s Balance Sheet” (Section 4), April. 30. See Article 127(1) of the Treaty on the Functioning of the European Union (TFEU). 31. The ECB takes into account a range of criteria to assess the eligibility of assets for its private sector asset purchase programmes, including asset class, credit ratings, maturity, place of issuance and denomination. 32. These arguments are discussed in the recent ECB Podcast episode “Tackling climate change as a central bank: Between motivation, obligation and limitation” that was published on 12 May 2021. In addition, see Schnabel, I.

[8] Since climate change is partially irreversible, such delays could prove detrimental. [9] In fact, the preliminary results of the ECB’s ongoing economy-wide climate stress test illustrate that the magnitude of long-term physical climate change risks by far exceeds the short-term transition costs associated with more stringent mitigation policies, as described by Vice President de Guindos in a recent blog post. [10] Other research corroborates the finding that an early and orderly transition is likely to reduce the extent of economic disruption associated with climate change. [11] Central banks can act as a catalyst to facilitate an orderly transition towards a greener economy. [12] Although central banks’ leeway to address climate risks within the remit of their mandate is still subject to debate[13], there are an increasing number of commentators who argue that central banks should take the implications of climate change into account. [14] First, central banks should ensure that climate risks are adequately incorporated both in their own risk management and in that of the financial institutions they supervise. Second, central banks can have an important role in fostering climate-related information disclosure by firms and financial institutions. [15] Finally, central banks have an array of potential instruments at their disposal to incentivise the issuance of green financial products. [16] However, we need to proceed with caution: as a European institution with statutory independence, the ECB is strictly bound by the provisions of the Union’s legal framework.