The European Central Bank (ECB) hinted at the possibility of integrating greener practices into its monetary policy, marking a shift towards addressing climate change in its operations.

Advocates have long urged the ECB to incorporate climate objectives into its strategies, including setting climate targets for its long-term loans to banks and refraining from purchasing bonds issued by polluting companies.

While such initiatives were put on hold in recent years as the ECB prioritised combating inflation, the bank indicated in its 2024-25 climate and nature plan release that this stance might evolve in the future.

The ECB stated its intention to explore potential adjustments to its monetary policy instruments and portfolios within its mandate to align with the transition to a greener economy, although specifics were not provided.

Previously, the ECB had implemented a green "tilt" when reinvesting proceeds from one of its main bond portfolios, but this practice was halted during the inflation-fighting period.

Despite criticism that this approach was too cautious, ECB board member Frank Elderson asserted that the tilting framework had effectively met its objectives and would persist. However, challenges remain in offering subsidised credit to banks in exchange for supporting green initiatives, such as identifying suitable borrowers.

While Elderson and fellow board member Isabel Schnabel advocate for more aggressive measures, dissenting voices like Belgium's Pierre Wunsch argue that addressing climate change is primarily the responsibility of governments. Pressure is mounting on central banks globally, including the U.S. Federal Reserve, to factor climate considerations into their policies and research.

The ECB's climate plan for 2024-25 will also involve a deeper analysis of the green transition and the repercussions of extreme weather events on inflation and the financial system.

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Source: Reuters