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Powering Net Zero Commitments

ECB Governor Christine Lagarde expected to make ECB a climate change pioneer

A study has shown that Christine Lagarde could transform the European Central Bank into a pioneer in the fight against climate change. She aims to do this by reducing the purchase of bonds issued by fossil fuel businesses as well as other heavy carbon emitters. 

As ECB Governor, she has pledged to ensure efforts to battle climate change are a major part of the central bank’s strategic review of tools and remittance, which are expected to be completed in the second half of the year.

At least two-thirds of the 33 economists polled in the study believe that the review can be used to determine if the ECB will break its traditional “market-neutral” principle of purchasing bonds in proportion to the market as a whole.

This move comes after environmental activists have accused the European Central Bank of purchasing € 248 billion in corporate bonds, which in turn strengthened the market bias in favour of heavy carbon emitters like utilities, airlines, oil and gas companies.

Paul Diggle, a senior economist at Aberdeen Standard Investments, said “market neutrality has always been a sham, as it involves the choice of what to buy and what not to buy. So why not make these choices consistent? [policy] Environmental setting?”

Other central banks have also been considering how to deal with climate change. The Bank of England for instance plans to undergo a climate stress test of the British banking sector sometime in 2021. The Swedish central bank on the other hand recently prepared foreign currency reserves for bonds issued by the Canadian and Australian regions as a result of high carbon emissions.

The Federal Reserve Board of Governors recently joined the Financial System Greening Network, which is a consortium of 75 central banks established to support the Paris Agreement climate goals. This sign further shows how the issue is raising the agenda of monetary policy. 

Stephen Coose, head of research at the Kiel Institute for World Economics, stated that the ECB was “very likely” to align its monetary policy with climate policy goals, even though it thought it was a “bad idea.”

But Diggle replied that “achieving climate goals is actually the ECB’s aim, given long-term risks associated with climate change, price stability targets.”

Considering that this problem appears to be divisive, certain economists expect there to be a compromise.

“It will probably reduce exposure to big things carbon emitters do not necessarily drop the market-neutral approach, or if it does, they do not justify it by correcting market failure, “said Berenberg economist Florian Hens.

Gilles Moec, Axa’s Chief Economist, stated that the ECB could try “carbon targeting” and “gradually reduce its large carbon emissions.” Asides from having issuers in the portfolio, the central bank could also provide incentives for the issuers themselves to actively reduce their carbon footprint.

As reported by THE FINANCIAL TIMES

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