Lagarde under pressure on climate risk, as scrutiny grows on central banks’ green credentials in tackling economic crisis

ECB is latest to be questioned, as its governing council meets today

Christine Lagarde, President of the European Central Bank (ECB), faces mounting pressure on climate risk and monetary policy as the ECB Governing Council gathers today.

The ECB was already under political pressure when, in February, the European Parliament urged it to investigate the impact of its monetary policy on climate change. 

Now, a letter to Lagarde, signed by the likes of, Climate Bonds Initiative, Client Earth and the New Economics Foundation is asking the ECB, among other things, to align its asset purchasing programmes with the Paris Agreement. is worried high-polluting sectors will disproportionately benefit from the ECB’s new €750bn Pandemic Emergency Purchase Programme (PEPP), focused on bond buying. Analysis by lobby group InfluenceMap finds that oil & gas companies ENI, OMV, Shell and Total issued new bonds in April 2020 that were bought by the ECB.

InfluenceMap says it raises “concerns about the alignment of the ECB's balance sheet with the EU's climate goals and policies including the EU's European Green Deal”. 

It is the latest wave of scrutiny over how central bank efforts to tackle the current crisis align with longer-standing climate goals.

The Bank of England is also under pressure as its extended corporate QE programme includes bonds from the likes of BP, Total and Shell’s BG Energy.

The Fed is buying corporate bonds and ETFs for the first time as part of an emergency stimulus package, and Friends of the Earth US says oil majors could greatly benefit from the $750m programme.

Democratic members of the US Congress and Senate, including Senators Elizabeth Warren and Kamala Harris and Congressman Alexandria Ocasio-Cortez, have written to Fed Chairman Jay Powell voicing concerns over the climate implications of the programme, as well as the appointment of BlackRock as manager.  

It appears the Fed is feeling the heat, with Politico reporting that it will announce the names of companies and municipalities that borrow under its massive emergency programmes; and it is certain its fossil fuel exposure will be closely scrutinised when the list is released.

The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) is also under pressure. The Fed is not a member, but major central banks such as the BoE and ECB are, and in a recent letter, NGOs including Positive Money Europe and the Sunrise Project, warn: “The current set of measures taken by different members of the NGFS are set to support high carbon emitters and contribute to a huge delay in climate action. Being a main international coordinator of central banks’ reflection about “greening” the financial system, the NGFS has a special responsibility to highlight and address this problem, both in their internal work and in public.”

The NGFS declined to comment.

Paul Schreiber of Reclaim Finance, a signatory to the letter, says that “as the body is based on the willingness of its members [the NGFS colloquially calls itself the “coalition of the willing”], it has the power to push the boundaries of what ist members, who are often cautious, can do.”

One “radical” call in the letter is for the NGFS to recommend its members exclude carbon-intensive assets from their asset purchase programmes.

But a climate crisis activist, who asked not to be named, says this approach could harm financial stability and cause transition risk. “There is no framework for identifying what is a carbon intensive asset and what isn’t. Not to mention that this is something that should come from political wings, or at least be co-created with them.This will take time to implement and get right. In an emergency response phase, things need to get done quickly.”

He adds: “This doesn’t mean we shouldn’t be preparing the ground now for this. So I would wholeheartedly agree that when the time comes to stimulate the economy, this needs to be done in a green way.”

One approach to “greening” asset purchase programmes is to integrate climate risk into risk assessments. It is an area that the Council on Economic Policies (CEP) has been researching for a number of years and Pierre Monnin, an economist at the think tank, says it wants central banks to consider climate risk when they assess eligibility for asset purchase programmes. “It is a core rule of central banks to buy relatively safe, investment-grade assets,” he says. “They should continue to focus on safe assets but measure their risk properly.”

“An investment-grade rating now does not reflect climate financial risk as rating agencies are not fully taking into account climate risk.”

But there is as yet no generally accepted method of measuring climate risk. Monnin argues that a central bank could take the rating of four providers in the climate risk space. “If three of these four say an asset is not investment grade because of climate risk then it should be considered as such. It is something that is possible to do even if there is currently no consensus.” 

Providers in the climate risk measurement space are growing, and include players such as South Pole, 2 Degrees Investing Initiative, 427, Beyond Ratings and Carbon Delta, as well as some of the large credit ratings agencies. 

Monnin says it has done research into what integrating climate risk would do to a central bank’s corporate sector purchase programme’s (CSPP) portfolio. The study is based on a Carbon Delta methodology and looks at the ECB’s CSPP portfolio in 2018.  

It found that eight bond issuers would fall out of the investment grade universe, and therefore would not be eligible for purchase by the ECB, if transition risks estimated by Carbon Delta were considered. This represents 4.8% of the issuers in the portfolio. 

The effect of a bond being eligible for CSPP is significant for the bond market. Ulf Erlandsson, who heads up the Diem Green Credit hedge fund, says: “I know several banks who marketed recent oil major bonds for the primary market as CSPP eligible, implying that investors should buy the bonds because ECB would. When it becomes a marketing argument for a bank to investors it’s pretty clear that it matters.”

He feels as asset purchases programmes grow bigger, central banks run a reputational risk if climate-related elements are not integrated, pointing to recent reports that $30bn in bond issuance from oil majors was being used to pay dividends.

“It’s a reputational risk if it transpires that QE programmes were financing the dividend payments of oil majors, while they as companies were facing a defunct business model.”