MNI INTERVIEW:ECB To Fine Banks Missing Climate Goals-Elderson

The European Central Bank needs to deliver on its inflation mandate to provide a stable backdrop for the green transition, Executive Board member and vice-chair of the Supervisory BoardFrank Elderson told MNI, adding that climate objectives are likely to be incorporated into future policy instruments including asset purchase programmes and that banks failing to meet environmental targets will be penalised.

Amid concern that rising interest rates may be a barrier to the eurozone’s green transition, Elderson stressed that “non-green” investments were also affected by higher funding costs.

“The best we can do is make sure that we deliver on our price stability mandate. That will create the stable environment in which the transition – including the required investment, which needs to be sped up – can take place,” he said in an interview, pointing to this month’s decision to raise the deposit rate for a 10th consecutive meeting as evidence of how seriously the ECB takes that commitment.

This year’s move by the ECB to begin disclosing the carbon footprint of its corporate bond holdings and non-monetary policy portfolios is a sign of things to come. While any new policies have to be balanced with the 2% inflation objective, the ECB is likely to incorporate climate objectives into future asset purchase programmes, he said.

CLIMATE IN MONETARY STRATEGY

“Any instrument needs to be effective to pursue our primary mandate of price stability, and it needs to be proportionate. It also depends on the environment – whether we are in a period of policy tightening or accommodation,” he said.

“But climate considerations are clearly part of the monetary policy strategy we adopted in 2021. I think it’s fair to assume that we will take climate considerations into account in the features of any type of instrument we may design in future − including any purchase programme.”

For the moment, tight labour markets, rising disposable incomes and upwards pressure on food and energy prices mean further monetary tightening cannot be ruled out, Elderson said.

“Of course, there are upward risks to inflation [...] Since July we have been alluding in our monetary policy statement to the importance of weather and climate conditions in this respect.”

But the ECB will maintain a meeting-by-meeting, data-dependent approach in the face of lower-than-expected growth and investment, falling export demand, tighter financing conditions and service sector weakening.

“What we’re seeing is a more protracted period of sluggish growth than we were expecting,” Elderson said. “We are comfortable with the decisions that we have taken on the basis of our recent assessments, and we will weigh any incoming data carefully, as always, in relation to our inflation outlook.”

The ECB’s role as a supervisor will also see an increasing green focus, and it will not hesitate to impose financial penalties on banks falling short of new standards for disclosures of carbon footprints and the climate risk of financial assets, Elderson said. (See MNI INTERVIEW: Italy NPL Plans Stray From Norm-Bank Supervisor)

FINES FOR MISSING TARGETS

The ECB has previously said it will name and shame banks that make insufficient effort to meet supervisory expectations, and a series of deadlines now loom.

“On the basis of what we saw a year ago, the glass is slowly filling, but it's not yet half full: it needs to be full by the end of 2024. We have said that we will be using our instruments, also our enforcement instruments, if needed, on these deadlines,” he said. “To be very clear, that means periodic penalty payments. That's a tough thing to do, so I think that there are serious teeth to this whole thing.”

Lenders should also be aware of an “exponential” increase in climate-related litigation, which could potentially target not just firms that pollute and those who finance the polluters, but also governments, central banks and supervisors.

“From our perspective, banks need to manage that risk at a time when there are certain cases in which the courts have endorsed rather far-reaching legal theories, including against states,” Elderson said. “It can no longer be taken for granted that those judgements will not be repeated or set a precedent, and that is something banks should be acutely aware of.”