Elaborating a Climate Change-Friendly Legal Perspective for the ECB

Abstract

Having reflected on the history of the interpretation of the European Central Bank’s mandate, and discussed the international developments concerning climate change on central banking and financial-sector supervision (NGFS, TCFD, BIS), this paper concludes as follows. The ECB’s primary mandate of maintaining price stability is predominant, in the core provisions (Articles 127(2) and 119(3) TFEU) and in the rules on exchange-rate policy (Article 219(1) and (2)TFEU). The ECB’s secondary mandate (to support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union; Article 127(2) TFEU) clearly supports an interpretation of its remit which takes climate change, and biodiversity loss, fully into account since the economic policies in the EU and the EU’s Climate Law make the direction of the Union’s policymakers crystal clear. Similarly, the Union’s objectives (Article 3 TEU) explicitly include climate-change related objectives: sustainable development, balanced economic growth, a high level of protection and improvement of the quality of the environment, solidarity between generations and protection of the rights of the child, the protection of human rights, in particular the rights of the child, protection of the Union’s citizens, and the sustainable development of the Earth. Beyond these strong arguments to read the mandate as not only permitting but requiring the ECB to take full account of climate change and biodiversity loss, additional arguments can be derived from the integration provisions (Articles 11 and 7 TFEU) and from the binding nature of the Paris Agreement (Article 216(2) TFEU). The EU’s Charter of Fundamental Rights provides an additional legal argument (Article 37) for my preferred reading of the ECB’s mandate. Whereas these legal arguments suffice, recourse to the primary mandate alone would be sufficient since the ever clearer consequences of climate change for price stability, and for financial stability, lead me – together with others – to conclude that there is a legal requirement to fully integrate climate change and biodiversity loss in the monetary policy operations of the ECB, not: a mere authorisation to do so. The open-market principle (Articles 127(1) and 119(2) TFEU) does not form an obstacle to this reading. On the contrary, it requires the ECB to support well-functioning markets which the current price setting of financial and other products are far from. There is no ‘market neutrality principle’ under EU law (even though central banks may have acted in accordance with this rule). An emergency situation reading of the mandate, and a focus on the relationship between climate stability and primate stability may further buttress this interpretation. This reading may have consequences for a variety of operations of the ECB, from investing its own funds in green assets to re-assessing and re-directing asset purchasing programmes for climate impact and requiring proof of ‘green-ness’ for collateral. All of this presupposes the existence of a robust green taxonomy, which the EU has adopted and is fast developing. Other elements of change may include taking a longer-term perspective in the price-stability objective and incorporating climate and biodiversity variables in research and policy-making. The results of the ECB’s monetary policy strategy review and an overview of the actions already undertaken show that the Euro Area’s central banking system has firmly taken the road towards climate resilience and incorporation of climate change into its activities. These activities include prudential supervision where the same legal grounds as applied to monetary policy apply. However, in this area, the legislative norms paly a dominant role. Due to their – thus far – very limited integration of climate change and biodiversity loss into account, the ECB will have to rely on the risk element inherent in any prudential standards to include climate change into its supervisory activities. It has done so already, inter alia with the adoption of its Guide on climate-related and environmental risks and the implementation of a wide-ranging climate change stress test. As to other ECB tasks, the promotion of the smooth operation of payment systems and the issue of bank notes seem most relevant from the perspective of climate change. The oversight of payments systems, and the possible introduction of a Central Bank Digital Currency, both provide opportunities to include environmental soundness. It is concluded, on the basis of the same arguments as prevail in the context of monetary policy, that the ECB is legally bound to do so. It is too early to provide an assessment of what has been undertaken thus far. Yet, recently realised movements on climate change, as well as the conclusions of the monetary policy strategy review and the announced climate action plan show a deep commitment and seem to indicate a willingness to embrace the full rigour of the ECB’s legal obligation in respect of climate change and biodiversity loss.