The European Central Bank should limit its climate risk exposure by buying debt issues from corporates aligned with the Paris Agreement on climate change, France central bank governor and ECB Executive Board Member François Villeroy de Galhau said Feb. 11.
Speaking at a conference in Paris, he said climate change needs to be at the heart of the ECB's mandate because of its mission to ensure price stability.
"Climate change shocks are potentially difficult for the central bank to manage due to their stagflationary nature, as they can cause both upward pressure on prices and a slowdown in activity," he said.
Climate change is regarded as a major risk to the global financial system, as it could result in a sharp fall in asset prices and increased volatility from an increasing number of extreme weather events such as hurricanes and rising sea levels. A group of central banks in December 2017 created the Network for Greening the Financial System to collaborate on addressing climate change. The U.S. Federal Reserve announced recently that it would join the group.
Villeroy de Galhau told the conference that the ECB, which oversees monetary policy for the 19 eurozone countries, is exposed to climate risk through its bond buying programs. Europe's central bank hasn't yet sufficiently taken climate into account and needs to reduce climate risk in its asset purchases, he said.
"I propose to start decarbonizing the ECB's balance sheet with a pragmatic, progressive and targeted approach to all corporate assets whether they be held on the central bank's balance sheet" or taken as collateral, he said.
Sovereign bonds would not be included because of the difficulties in assessing the climate policies of each eurozone member, while it is possible to calculate climate exposure of more than 90% of corporate bonds eligible for ECB bond purchases, Villeroy de Galhau noted.
The ECB could limit its bond buying purchases to corporates aligned with the Paris agreement on climate change, which commits to keep a rise in global temperatures to less than 2 degrees C, Villeroy de Galhau noted. The central bank could buy greater quantities of securities of Paris-aligned companies, he added.
That would be more comprehensive than a "green" quantitative easing program, which would have a lower impact because it would only buy green bonds — debt instruments that finance environmentally friendly projects.
Lack of data comparability
Villeroy de Galhau also stressed the need for the ECB to require issuers to disclose climate exposure through harmonized metrics. The lack of comparable data between companies and institutions is viewed as a hurdle to the growing sustainable finance movement.
"Neither in Europe, nor even in France, are we in a position today to compare — and therefore correctly assess — the heterogeneous data published by financial institutions and companies," he told the conference.
Under EU law, large companies must disclose certain information about how they operate and manage social and environmental challenges. This nonfinancial reporting directive and the push for standardized ESG data will be the "battle of 2021," Villeroy de Galhau said.
Further, he said the ECB will only work with ratings from ratings agencies that include adequate information on climate-related risks.
ECB President Christine Lagarde has made it clear that "green" goals will play an increasing role in the central bank's policies. At a conference in January, she announced ECB plans to set up a new climate center, noting that climate change affects all the central bank's policies.