The idea of adding a green dimension to the ECB’s Asset Purchase Programme has sparked lively debate, but this would bring only marginal benefits at best. At worst, if directed at green bonds, it could distort a still small and illiquid market.
If the ECB wants to make a real difference, it should follow Sweden's Riksbank and divest assets from unsustainable or polluting businesses.
It is not a simple task. The ECB’s first responsibility is to the financial stability of the eurozone, and any large change in its investment behaviour could pose risks.
Further, the issue of what is an unsustainable business is horrendously thorny. Punishing some firms might make it harder for them to transition to more sustainable models — or at least, that is what they will complain.
But those are edge cases. That drawing the boundaries is difficult is not a sufficient reason not to try.
If financial markets are to play a part in engineering the sustainable economy of the future, their biggest players cannot ignore their best tools.
Markets are about prices. If we want to deter a type of behaviour, that behaviour must become more expensive. Divestment is the best way to bring that about, and central banks — still essentially an arm of the state, in spite of their vaunted independence — have a responsibility to lead the way.