The European Central Bank (ECB) should take climate criteria into account even more than before within its mandate: ECB Executive Board member Isabel Schnabel spoke out in favor of this on Tuesday at a central bank conference in Stockholm in honor of the retiring Swedish central bank boss Stefan Ingves.

Christian Siedenbiedel

Editor in Business.

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US Federal Reserve Chairman Jerome Powell, on the other hand, emphasized at the event that the US Federal Reserve (Fed) is not pursuing any climate policy: “Without explicit legislation from Congress, it would be inappropriate for us to use our monetary policy or regulatory instruments to promote a greener economy or to achieve other climate-based goals,” said Powell: “We are not climate politicians – and we will not be in the future either.” Some other central bankers made similar statements.

Powell was more reserved on questions of current monetary policy.

However, he said: "Restoring price stability when inflation is high may require measures that are unpopular in the short term."

Schnabel explained that the interest rates of the ECB would have to rise “significantly” and “continuously”: “Inflation will not subside of its own accord.”

At the same time, however, the central bank must make greater efforts to meet the Paris climate goals.

Since October last year, the ECB has been taking climate criteria into account when reinvesting money from maturing corporate bonds.

However, these are comparatively small amounts.

The central bank has not been buying any bonds net since July, and it also wants to start in the spring, at least not completely reinvesting the money from bonds that are maturing.

Accordingly, the green parameters "lose part of their effect," Schnabel indicated.

No exclusion of climate sinners

Therefore, it should be considered not to stop at green reinvestment - but to actively reallocate the stocks.

However, the ECB director is not advocating that the central bank completely abandon bonds from oil companies, for example, as the environmental protection organization Greenpeace had recently demanded: "At least initially, we should not completely part with the companies whose measures to deal with the green transformation are particularly important, but rather create incentives for them to further reduce their emissions.”

However, it should not remain with a greener orientation of the corporate bond holdings - Schnabel also wants to take a look at the central bank's large holdings of government bonds.

At the beginning of the green central bank plans, ECB President Christine Lagarde said that the states of the euro area would not now be sorted according to greener and less green and then a decision made on the purchase of government bonds.

Schnabel also emphasized that aligning government bond holdings with the Paris climate targets is proving to be difficult for various reasons: First, the purchase of government bonds is based on a capital key that limits the scope for green criteria.

Second, there is still no reliable framework to assess the extent to which government bond portfolios are in line with the Paris Agreement.

And thirdly, there are still comparatively few explicit “green” bonds issued by governments.

Schnabel suggests two ways of proceeding nonetheless: One is to increase the proportion of bonds issued by supranational institutions.

With these, a larger part of the outstanding bonds is already green.

The second, complementary option is to gradually rebalance the government bond portfolio as governments expand their green bond offerings over time.

Rate hikes and green transformation

The ECB director countered the assessment that interest rate hikes fundamentally hindered the green transformation.

Some have argued that monetary tightening will result in less investment in renewable energy and continued reliance on expensive fossil fuels will lead to persistent inflationary pressures - "fossil inflation".

While it is true: "When interest rates rise, financing investments in green technologies becomes more expensive, which entails the risk that higher capital costs could slow the pace of decarbonization," said Schnabel.

Nevertheless, the current course of tightening monetary policy is also the right one for the green transformation: "Firstly, the timely restoration of price stability creates the conditions for the green transition to flourish in the long term," said Schnabel: "And secondly, the biggest obstacle is rapid decarbonization remains the lack of progress by governments in implementing past climate commitments.”