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ECB going slow but getting there

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Pundits in the ESG space are already levelling disappointed criticisms at the ECB’s new green monetary policy strategy. But while it may not be perfect, it is important to recognise that the ECB has taken a valuable and important step forward.

Some critics are claiming that the new approach focuses too heavily on the risks that climate changes poses to financial stability and corporate credit, and not enough on mitigating the damage to the climate that our financial model is doing.

There may be some truth to this. Certainly, the Bank of England has taken a firmer stance.

But unlike the BofE, the ECB has to keep the eurozone happy — 19 countries adding up to a population more than five times the size of the UK. Frankly, it’s a more important and influential institution. If its strategic reviews produce policies laden with more compromises, that’s no surprise.

Yes, the ECB could be doing more, but it’s unfair to suggest that its green policy focuses entirely on financial risks and ignores the risk to the environment.

The introduction of climate footprint related factors into its assessment of corporate credit will go some way towards punishing high emitters, since those will likely face downgrades. This affects not just companies exposed to the risks of climate change, but those most responsible for it.

The ECB’s strict sustainability disclosures on companies’ transitions to sustainable business models could also prove to be a powerful tool in reshaping the economy.

It’s worth remembering too that this process is not complete. The ECB’s thinking will evolve over time and perhaps new tools will be added.

Of course, it’s not perfect. It would have been nice for the ECB to do more to punish polluting companies. The carrot is much in evidence in the form of the ECB’s promise of purchasing to pursue market efficiency. The stick, less so. But that’s also hardly surprising. A change of this sort in the ECB’s mandate is an intensely radical step.

The cherished institution of central bank independence frees the ECB from the manipulation of politicians, but it also makes it less accountable.

The ECB is right to be restrained in the way it wields its power. If citizens are to have no control over their central bankers, then deviating from narrow aims of financial stability must be done only cautiously. Abandoning neutrality is always contentious.

In that respect, the ECB has walked a nice line: acknowledging the reality of anthropogenic climate change, its relevance for financial stability, and the importance of promoting positive developments in the industry, but without stepping too far into the territory of democratically elected legislators.

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