[7] Europe therefore urgently needs to make faster progress towards creating a true capital markets union, with a strong focus on equity markets. Euro area equity markets remain too shallow and risk-sharing across borders too limited to lift the economy onto a more sustainable growth path. There is also a geopolitical dimension: financial market structures are gradually readjusting after the United Kingdom’s exit from the EU. Green finance has the potential to tip the scale to one side or the other and act as a catalyst for promoting the provision of financial services more broadly throughout the euro area. Second, faster progress is needed on disclosure and standardisation. For markets to better support the greening of the economy, and to mitigate risks to financial stability, asset prices need to correctly reflect the externalities associated with climate change. At the current juncture, however, financial markets are suffering from various market failures. Uncertainty about what actually qualifies as green activity is one of them. Common and clear definitions are a fundamental building block for facilitating the market pricing of environmental risks. The adoption in mid-June of the European Commission’s taxonomy regulation was an important step in establishing a classification system for sustainable economic activities. But three words of caution are in order. First, the framework is expected to become fully operational only after the adoption of its delegated acts in 2021 and 2022 and so will provide limited guidance at a time when issuance needs are reaching historical  levels.

Disclosure of climate-related information should therefore become mandatory and more standardised under the revised Non-Financial Reporting Directive, while ensuring proportionality to avoid imposing an excessive burden on small and medium-sized companies. [9]  A role for central banks in fighting climate change? What then, if any, is the role of central banks, and monetary policy in particular, in supporting the transition towards a low-carbon economy? [10] The starting point for answering this question is the ECB’s primary objective: price stability. Climate change, if not addressed swiftly, can be expected to affect the economy in a way that poses material risks to price stability in the medium to long term. On the one hand, the longer the risks of global warming are ignored and policy action delayed, the higher the risks of very large and persistent shocks to output and inflation. So far, most central banks could afford to look through climate-related shocks, mainly because their most visible effects were largely local and temporary. The coronavirus pandemic demonstrates the challenges central banks are facing in countering large and persistent global shocks, while remaining faithful to their primary mandate. It is with this motivation that we are currently investigating how to integrate climate-related risks into our core macroeconomic models. On the other hand, the ability of central banks to react to such large shocks may be impaired. Rising temperatures and an increased frequency of natural disasters may further suppress potential output growth and hence the real equilibrium interest rate around which central banks have to calibrate their policies.