Can the European Central Bank translate words into action regarding environmentally friendly policies amidst Europe's current burning crisis?

European Central Bank (ECB) Updates Policy Strategy Amid Climate Concerns

Last week, the European Central Bank (ECB) published its updated policy strategy statement, demonstrating support for the global scientific consensus on climate change. However, the bank's actions have been criticized for undermining the green transition and favoring high-polluting companies.

The ECB's 2021 climate plan introduced a green tilting policy to shift the portfolio away from dirty companies and towards green ones. This policy was intended to penalize high-carbon assets and favor green ones. However, the bank suggested that it might continue with a small amount of proactive tilting of the existing portfolio in the future, but the suggested target is too gradual for this to have a major impact.

The ECB's corporate bond portfolio, amassed between 2016 - 2022, was criticized for favoring environmentally harmful companies. In an effort to remove carbon bias, the ECB has taken measures to integrate climate-related risks into its risk management practices, excluding assets that do not meet climate and sustainability criteria, and aligning purchases with the EU’s climate goals, including favoring green bonds or sustainable assets while phasing out carbon-intensive exposures. This includes adjustments to eligibility criteria for collateral and asset purchases to reflect their carbon footprint and sustainability performance.

However, the ECB's interest rate policy has been actively undermining the green transition, making it more expensive to invest in green technologies. The high-sensitivity of the renewable energy industry to interest rates means that the bank's green tilting policy has particularly harmed this sector. In July 2024, the ECB's governing council decided not to proceed with this approach.

The ECB's collateral framework, which determines what assets can be used as collateral for loans, also has an inherent carbon bias, favoring high-polluting companies. A manifesto signed by over 40 NGOs called for the ECB to implement three policies to support the green transition, including applying green tilting to the ECB's existing corporate bond portfolio, reforming the collateral framework to penalize dirty assets and favor green ones, and introducing green targeted longer-term refinancing operations with lower interest rates for clean energy investments.

The ECB's updated strategy statement includes a commitment to consider the implications of climate change and nature degradation for monetary policy and central banking. Despite this commitment, the bank continues to hold lots of bonds from high-polluting companies. The ECB ranked fourth out of twenty in the 2024 Green Central Banking Scorecard, with a meagre rating of 87 out of 130.

Soaring gas prices after Russia's invasion were a predominant cause of the recent huge spike in inflation. The ECB stopped buying new corporate bonds in July 2023, meaning that the green tilting policy has had no direct effect since then. The ECB's inaction on climate change has been met with calls for more ambitious policies to support the green transition and combat environmental harm.

Can the European Central Bank translate words into action regarding environmentally friendly policies amidst Europe's current burning crisis?