It wasn’t a surprise, but the European Central Bank nonetheless grabbed headlines last Thursday by raising its benchmark interest rate 75 basis points to the highest level for more than a decade.
That move came despite fears the eurozone is heading for recession because of an energy crisis triggered by Russia’s throttling of its gas supplies. But with inflation in the bloc running at more than four times the ECB’s 2 per cent target, further monetary tightening is on the cards. You can get the full lowdown in this excellent pair of stories by the FT’s Frankfurt bureau chief Martin Arnold and deputy markets news editor Harriet Clarfelt.
Amid these extraordinary conditions, the ECB is continuing to increase its work on climate risks, in the face of criticism from some that this is a distraction from the inflation battle. It’s widely seen as a trailblazer among central banks in this space, meaning its climate strategy has important implications for banks around the world, as well as in Europe.
Martin and I got a window into that strategy through a conversation in Frankfurt with one of its main architects, board member Frank Elderson, just before the ECB went into its quiet period ahead of Thursday’s monetary policy meeting. His remarks give a sense of the huge challenges the institution faces — and of the thinking that will guide its movements in the tumultuous months ahead. (Simon Mundy)
ECB’s Frank Elderson: Climate risk is ‘core curriculum’
A couple of months ago we flagged an acerbic remark by former US treasury secretary Larry Summers, taking issue with central bankers’ growing focus on climate-related risks. Comparing them with children neglecting their homework for the sake of extracurricular activities, Summers said: “Maybe you don’t get to take on global climate change when you’re having double-digit inflation rates.”
Arguably the most energetic major institution in this space has been the European Central Bank, which has started ratcheting up pressure on banks around their climate-related disclosures, and recently promised to start “decarbonising” its giant corporate bond portfolio.
Has the ECB been getting distracted from its core mission? We raised that question during a conversation at the institution’s towering Frankfurt headquarters with Frank Elderson, a Dutchman who is one of six members of the ECB’s executive board, and a key driver of its climate strategy.
Elderson fired back that the importance of climate-related financial risk was “no longer controversial” — that the potential for disruption to the banking sector, both from the accelerating energy transition and from the immediate physical impacts of climate change, puts it “squarely within the mandate” of financial supervisors. “If ever there was ‘core curriculum’,” he said, alluding to Summers’ jibe, “here you have it.”
From 2018 until this year, Elderson was the first chair of the Network for Greening the Financial System, a climate-focused grouping of central bankers and bank supervisors. Since its inception, the NGFS’s membership count has risen to well over 100 institutions. Elderson cited that rapid growth to back up his claim of a strong climate consensus among central banks — something he says will help push faster movement by global banks on climate risks.
Yet the challenge facing bank supervisors on this front is substantial. In July, the ECB announced the results of its first climate stress tests, in which 41 of the larger European banks reported estimates of their potential losses from climate and energy transition risks. The total came to just €70bn — a modest sum that the ECB said was clearly a severe underestimate.
When we asked how much higher a serious estimate might be, Elderson demurred. “It’s not that we have some other number we’re trying to hide,” he said. Some had argued that this maiden exercise should not even have tried to produce a quantitative estimate of climate risk, because the methodology for producing such numbers was still so under-developed.
This year’s climate stress test, Elderson said, should be seen as a learning exercise. More rigorous iterations look set to follow, though Elderson declined to comment on the timing. The value of the exercise, he said, lay partly in the fact that it helped the ECB to identify best practices in banks’ risk assessments, and push underperformers to match them. “We can look into the kitchen of all the banks that we supervise, in a way that the banks of course cannot,” he said.
Another important development this summer came with the ECB’s July announcement that it would start to “tilt” its €386bn corporate bond portfolio away from carbon-intensive assets, starting in October. That led to criticism from some quarters that the ECB was overreaching by effectively moving to raise the cost of capital for highly polluting companies.
However, pressure groups say it is still not doing enough. In a letter to the ECB last week, 18 civil society groups including Greenpeace, the WWF and Positive Money called on the central bank to sell “the most climate-harmful assets” including any bonds issued by companies involved in coal and other fossil fuel sectors.
ECB president Christine Lagarde has made clear her willingness to break new ground in this area. At a conference in June, she said she was “not giving up” on the idea of green lending by the ECB, providing banks with ultra-cheap finance if they meet certain targets. “Why wouldn’t we have an open mind about it?” she said. “I know it’s not squarely in the mandate and it is not necessarily in what we consider as the prime objective but, you know, if we don’t try then we have no chance of succeeding.”
The hitch with such ideas is that, as Elderson acknowledged, any expansion of its climate-focused efforts must not call into question the priority the ECB places on achieving its primary mandate of price stability, defined as inflation of 2 per cent. For many observers, providing more cheap finance would sit uneasily with the ECB’s efforts to rein in inflation by raising rates.
“People in this institution can count, and they can certainly count to two,” Elderson said. “So people do know the difference between primary and secondary objectives. We will always be led by our primary objective, which is price stability.”
That objective has rarely looked more challenging in recent decades, as inflation surges across Europe amid the energy market chaos sparked by Russia’s invasion of Ukraine. The ECB’s bank supervisors would take a pragmatic approach to the current conditions, Elderson said, and would not stand in the way of fossil fuel financing aimed at tiding Europe through an energy-stressed winter.
But the crisis has added new urgency to the drive to move Europe away from fossil fuels, and underscored the need for serious transition plans at banks, which should expect growing pressure on this front from the ECB, Elderson warned.
“I say to the banks, one of you is going to be the bank that gives the last loan to the last coal mine,” he said. “That’s fine. But I want to know what you’re going to do the next day to earn money. And I want to know that not all of you are betting on being the last one.” (Simon Mundy and Martin Arnold)
Sydney seeks to ban fossil fuel company ads
Sydney is aiming to become the first big city in the Asia-Pacific region to prohibit advertising from fossil fuel companies, after council members voted in favour of a ban late last month.
“Fossil fuels are not only the main driver of global warming, air pollution from burning fossil fuels kills more people globally than tobacco,” said Belinda Noble, president and co-founder of Comms Declare. The group campaigns to implement restrictions on advertising by coal, oil and gas companies, and includes more than 300 marketing, public relations and advertising professionals as well as more than 90 climate and community organisations.
Research from Yale University showed that pollution from the burning of coal, oil and gas caused 8.7mn premature deaths in 2018, while the World Health Organization estimated that tobacco kills 8mn people each year.
The city of Sydney is investigating how it would prevent fossil fuels from being promoted at its events and on its properties, as well as which ads would fall under the proposed ban. Comms Declare has called for a “blanket ban”, which could erase ads about not only oil and gas operations from the city’s properties, but also fossil fuel company campaigns about solar power projects and electric charging stations.
Fossil fuel companies advertising “green messages” are like tobacco companies advertising menthol cigarettes, Noble told Moral Money, adding that they gave consumers a false sense of comfort about “a potentially deadly habit”. She also pointed out that fossil fuel companies’ “green” ads highlight the tiny percentage of their business that is clean, while these companies continued, and often expanded, their fossil fuel businesses.
Sydney council members’ move reflects a rising pressure on advertising companies to stop supporting high emission activities. So far, nearly 400 agencies have supported the Clean Creatives campaign that calls on companies to drop fossil fuel companies as their clients. France recently became the first European country to ban fossil fuel ads.
While a call for a blanket ban on the fossil fuel industry is gaining momentum globally, some specialists argue that all companies that are legitimately transforming and innovating to decarbonise should have the right to promote the positive changes they are making.
“Consumers need to know and understand the real changes taking place in the market, and the availability of greener products and services so they too can make the changes themselves,” said Mike Spirkovski, founder of Sydney-based creative agency the Sustainability Revolution and former chief creative officer of advertising Saatchi & Saatchi Australia.
In addition, the rule to only ban ads from fossil fuel companies doesn’t feel fair when the city “is happy to continue to advertise and partner with other major carbon creators across agriculture, aviation, transport, shipping, manufacturing, building and construction”, Spirkovski told me. (Tamami Shimizuishi, Nikkei)
Since the death of Queen Elizabeth II last Thursday, there’s been speculation about whether King Charles III will continue his efforts of recent years to push for action on climate change. To some, he has a duty to keep at it; others argue that he must now adopt his late mother’s studied public silence on policy matters. If the new monarch decides to stick his oar in on green finance, this November 2020 speech gives a handy 10-point guide to the ideas he might throw his weight behind.