Bond-buying programs must factor in climate risk, says ECB official

The European Central Bank should limit its exposure to climate risk by buying debt issues from companies aligned with the Paris agreement on climate change, The governor of the French central bank and member of the executive board of the ECB, François Villeroy de Galhau, said on February 11.

Speaking at a conference in Paris, he said climate change must be at the center core of the ECB’s mandate because of its mission to ensure price stability.

“Climate change-related shocks are potentially difficult for the central bank to manage due to their stagflationary nature, as they can lead to both upward pressure on prices and a slowdown in activity,” he said. -he declares.

Climate change is considered a major risk to the global financial system, as it could lead to a sharp decline in asset prices and increased volatility due to an increasing number of extreme weather events such as hurricanes and rising sea levels. the sea. A group of central banks created the Network for Greening the Financial System in December 2017 to collaborate in the fight against climate change. The US Federal Reserve recently announced that it would join the group.

“Start to decarbonize”

Villeroy de Galhau told the conference that the ECB, which oversees monetary policy for the 19 eurozone countries, is exposed to climate risk through its bond-buying programs. The European Central Bank has not yet sufficiently taken climate into account and must reduce climate risk in its asset purchases, he said.

“I propose to start decarbonising the ECB’s balance sheet with a pragmatic, gradual and targeted approach to all corporate assets, whether held on the central bank’s balance sheet” or taken as collateral, he said. .

Sovereign bonds would not be included due to the difficulties in assessing the climate policies of each member of the eurozone, while it is possible to calculate the climate exposure of more than 90% of corporate bonds eligible for purchases. ECB bonds, noted Villeroy de Galhau.

The ECB could limit its bond purchases to companies aligned with the Paris Climate Change Agreement, which pledges to keep global temperature rises below 2 degrees Celsius, Villeroy de Galhau noted. The central bank could buy larger amounts of securities from Paris-aligned companies, he added.

It would be more complete than a “green” quantitative easing program, which would have less impact because it would only buy green bonds – debt instruments that finance environmentally friendly projects.

Lack of comparability of data

Villeroy de Galhau also highlighted the need for the ECB to require issuers to disclose climate exposure through harmonized measures. The lack of comparable data across companies and institutions is seen as a barrier to the growing sustainable finance movement.

“Neither in Europe, nor even in France, are we today able to compare – and therefore correctly assess – the heterogeneous data published by financial institutions and companies”, he declared during the conference.

Under EU law, large companies must disclose certain information about how they operate and deal with social and environmental challenges. This directive on non-financial reporting and the pressure to standardized ESG data will be the “battle of 2021”, said Villeroy de Galhau.

Furthermore, he said the ECB will only work with ratings from rating agencies that include adequate information on climate-related risks.

ECB President Christine Lagarde has made it clear that “green” goals will play an increasing role in central bank policies. At a conference in January, she announced the ECB’s plan to create a new climate center, noting that climate change affects all central bank policies.

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