The reening of the European Central Bank - European Central Bank's historic pledge on climate change - Natixis
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CENTER OF EXPERTISE & INNOVATION
The reening of the
European Central Bank
European Central Bank’s historic
pledge on climate change
gsh.cib.natixis.com
ECB released its action plan to include climate change
considerations in its monetary policy strategy
▪ On 8 July 2021, the European Central Bank (ECB) disclosed its new action
ECB’S GENERAL ANNOUNCEMENTS
plan to include climate change considerations in its monetary policy
strategy. The long-awaited commitments from the ECB are detailed in a 1. Further incorporate climate change considerations
roadmap extending to 2024. into its monetary policy framework
▪ The results of the ECB’s strategic review are groundbreaking: 2. Expand its analytical capacity in macroeconomic
modelling, statistics and monetary policy regarding climate
1. It is the first strategic review of the institution since 2003; change
2. It set a new inflation goal of 2% (before this goal was “below, but close
to, 2%”); 3. Include climate change considerations in monetary
3. For the first time since its creation, the ECB has decided to integrate policy operations in the areas of disclosure, risk
climate change into its monetary policy strategy/considerations; assessment, collateral framework and corporate sector
4. The ECB is moving away from the "market neutrality principle", which asset purchases
had been the subject of much debate between those who argued that the 4. Implement the action plan in line with progress on
fight against climate change was outside the ECB's role, and others who the EU policies and initiatives in the field of
argued that this objective was perfectly in line with the ECB's mandate. environmental sustainability disclosure and reporting
What is the “market neutrality principle” ? CONTEXT
▪ Increasing pressures from civil society
Market neutrality proscribes the ECB from preferring one sector over another ▪ Growing awareness of the impacts of climate change on
and to distort market by intervening on purpose (i.e., “by design”) in specific prices and financial stability among central banks
market segments. Economic orthodoxy on this matter asserts that it does not (NGFS; commitments made by China, Brazil, Sweden
fall within the mandate of Central Banks to discriminate between assets (be or the UK central banks)
it favoring or penalizing) based on environmental criteria. ▪ Arrival of Christine Lagarde at the head of the ECB
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Detailed roadmap of climate-related actions
Areas of activity Detailed commitments Timeline
Eurosystem/ECB staff macroeconomic Introduce technical assumptions on carbon pricing for forecasting and regularly evaluate the impact of climate-related fiscal
2021-2022
projections policies on the Eurosystem/ECB staff macroeconomic projections baseline
Macroeconomic modelling & Integrate climate risks into the ECB’s workhorse models and assess their impact on potential growth. Conduct scenario
2022-2024
scenario analysis analyses regarding transition policies. Model implications of climate change for the transmission of monetary policy
Statistical data for climate change risk Develop new experimental indicators, covering relevant green financial instruments and the carbon footprint of financial
2022
analyses institutions, as well as their exposures to climate-related physical risks
Market neutrality & efficiency concepts Assess potential biases in the market allocation amid market inefficiencies and the pros/cons of alternative allocations.
2021-22
in monetary policy operations Make concrete proposals for alternative benchmarks, in particular for the CSPP
Disclosures in line with EU policies as
an eligibility requirement in collateral Proposal and adoption of EU disclosure regulation. Design adequate policies and conduct legal and operational preparations 2021-2022
framework and asset purchases
Climate stress-testing of the Conduct pilot stress test based on the 2021 ECB economy-wide climate stress test and 2022 supervisory climate stress test
2022
Eurosystem balance sheet of individual banks. Build upon the pilot stress test and introduce regular climate stress-testing from 2024
Assess whether the credit rating agencies accepted by the Eurosystem Credit Assessment Framework have disclosed the
Climate change risks in credit ratings
necessary information to understand how they incorporate climate change risks into their credit ratings; develop minimum Mid-2022
for collateral and asset purchases
standards for the incorporation of climate change risks into its internal ratings
Consider relevant climate change risks when reviewing the valuation and risk control frameworks for assets mobilised as
Climate change risks in
collateral by counterparties for Eurosystem credit operations; monitor structural market developments in sustainability 2022-2024
the collateral framework
products and support innovation in sustainable finance
Adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, start
Climate change risks in the CSPP Q1 2023
disclosing climate-related information of the corporate sector purchase programme (CSPP)
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C2 - Internal NatixisCentral banks’ greening: from “market neutrality” to “market efficiency”
Mandates are redefined in order to integrate climate considerations
▪ The ECB disclosed (2021) its action plan to include climate ▪ Pilot exercise on climate risks conducted by Autorité de Contrôle
change considerations in its monetary policy strategy (climate Prudentiel et de Résolution (ACPR), results published in 2021 for the
change criteria in CSPP*, new macroeconomic models, disclosures banking and insurance groups
requirements for eligibility as collateral & asset purchases, stress ▪ Objectives reached: equity segment of the funds portfolio aligned
tests, review of credit ratings) on 2°C; Improvement in the portfolios’ climate and ESG
▪ Commitments are detailed in a roadmap until 2024 performance (i.e. -41.4% of exposure to fossil fuels); exit from coal
by 2024
▪ Launch of its Climate Change Center in March 2021 & publication of
▪ Discussion Paper on options for greening the Corporate Bond 3rd Responsible Investment Report
Purchase Scheme (2021)
▪ Climate Biennial Exploratory Scenario to explore the financial
risks posed by climate change ▪ To require banks to account for potential losses from droughts,
▪ Release of supervisory expectations (2019) for banks and insurers floods, forest fires and other climate-related risks. Banks to
(management of climate-related financial risks, covering governance, account for transition risks and may incorporate climate change-related
risk management, scenario analysis & disclosure). risks into bank stress tests
Deadline for embedding these expectations is 2021
▪ Issue of a new version of “Banking Sector Financial Institution Green
▪ Creation of a Financial Stability Climate Committee and a Finance Assessment plan” (2021).
Supervision Climate Committee in 2021 ▪ Under the new evaluation, financial institutions will be graded
▪ However, during the Green Swan Conference, Powell asserted “not based on metrics including the share of total assets made up by
seeking to be climate policy implementers”, limiting the Fed’s both green loans and green bonds (instead of green loans only in
efforts to researching, collecting and providing information on the 2016 version)
climate-related risk
▪ The Network for Greening the Financial System (NGFS) is a network
▪ The Swedish central bank announced (late 2020) the inclusion of
of 83 central banks and financial supervisors that aims to accelerate
green considerations in its purchasing programs, notably to
the scaling up of green finance and develop recommendations for
purchase more green bonds
central banks' role for climate change
▪ 1st time a Central Bank explicitly targeted green and sustainable
▪ Publication of a Report on climate scenarios and launch of a dedicated
assets (our article here)
website
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*CSPP: Corporate Sector Purchase Programme
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