[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.

[28] Other central banks have followed similar principles to reduce price distortions from their asset purchases. [29] While the concept of market neutrality is related to the Treaty principle[30] of “an open market economy with free competition, favouring an efficient allocation of resources”, it is not per se a rule in primary law. The ECB already now deviates from market neutrality in several instances. For example, the application of eligibility criteria for purchases implies that the ECB’s bond holdings are not necessarily proportional to market capitalisation. [31] Furthermore, under the public sector purchase programme (PSPP) and the pandemic emergency purchase programme (PEPP), sovereign bond purchases are guided by the ECB’s capital key rather than market capitalisation. As I have argued before, the existence of climate externalities implies that we have to reconsider the notion of market neutrality. [32] In the presence of market failures, adhering to the market neutrality principle may reinforce pre-existing inefficiencies that give rise to a suboptimal allocation of resources. [33] The Treaty clearly stipulates that the ECB should pursue its mandate by favouring an efficient allocation of resources. [34] If the market misprices the risks associated with climate change, adhering to the market neutrality principle may instead support a market structure that hampers an efficient allocation of resources. In view of such market failures, it seems appropriate to replace the market neutrality principle by a market efficiency principle. Such a principle would explicitly recognise that a supposedly “neutral” market allocation may be suboptimal in the presence of externalities.