The European Central Bank (ECB) seems to be wading deeper into political territory, opening an interesting debate on what exactly is the role of central banks.
The ECB recently published a guide to the banks under its supervision, explaining how it expects them to consider risks related to climate change and the environment in their business strategies and their risk management.
The central bank also published a report in which it concluded that none of the European banks under its supervision meet the minimum level of disclosures set out in the above-mentioned ECB Guide on Climate-Related and Environmental Risks.
It is not compulsory (yet) for banks to follow the ECB guide, but it “serves as a basis for supervisory dialogue,” in the central bank’s own words.
This sounds like a well-meaning initiative, but unfortunately climate-related and environmental risks are political hot potatoes. There is no real agreement at a European level on how to define these.
Yes, there are a lot of big words and plans put forward, but when it comes right down to it, politicians diverge in terms of what and where the risks are, with battle lines drawn across national interests.
To give just an example, in France the use of nuclear energy is almost a religion, whereas Germany banned the use of nuclear power and will decommission its remaining nuclear plants by 2022. However, according to some reports part of the energy previously produced by nuclear plants in Germany came from burning coal after these were closed.
How can a bank that lends money to companies in France and Germany correctly assess the climate risks of these companies, if the authorities themselves do not agree on how to go about it?
Debt issuers and rating agencies
The ECB’s foray into the field of prevention of climate change risks does not stop at prudential regulations.
“We owe it to European taxpayers to keep the financial risks that arise from our monetary policy operations in check,” Jens Weidmann, president of the Deutsche Bundesbank, said in a recent speech.
“In my view, the Eurosystem should consider only purchasing securities or accepting them as collateral for monetary policy purposes if their issuers meet certain climate-related reporting obligations. Similarly, we could also examine whether we should use only those ratings issued by rating agencies that appropriately include climate-related financial risks.”
However, it will be difficult for the ECB to go down that route. How will it decide if the issuers’ climate-related reports are genuine, or guilty of “greenwashing”?
In the face of a market crisis of the magnitude of the one we saw last March, when panicked investors were selling whatever they could, would the central bank have the time and inclination to pick and choose the assets it buys?
And finally, will the central bank be accused of picking winners and losers, and of favouring certain countries and companies over others?
Weidmann does not ignore these issues. Although he, like a lot of people, is frustrated with the slow pace of politicians faced with the challenges of climate change, he recognises that central banks “do not have the democratic legitimacy to correct political action or inaction.”
“We were not granted independence to make the decisions that politicians are unwilling to make themselves,” he said. “We were granted independence because independent central banks are better equipped to safeguard price stability than central banks that are controlled by the government.”
But despite Weidmann’s unequivocal conclusion, the debate over the role of central banks when it comes to public policies is far from over. In fact, it is probably just beginning.