The European Central Bank (ECB) and the National Central Banks (NCBs) play a crucial role in the transition towards a net zero economy.
Through its monetary policies, the ECB has the ability to incentivise decarbonisation while ensuring price stability and financial balance within the Union. In this regard, the results of a study conducted by the ECB for 2023 highlight that accelerating the transition is the most effective strategy for reducing economic risks and costs. As emphasised by ECB Vice President Luis de Guindos, more assertive monetary policies are essential to achieving the goals of the Paris Agreement. This is because the EU’s reliance on fossil fuels exposes the European economy to systemic risks and instability.
According to the Treaty on the Functioning of the European Union (TFEU), the primary objective of the European System of Central Banks (ESCB), of which the ECB is part, is to maintain price stability. However, with this primary goal in mind, the ECB is also called upon to support the general policies of the Union, including, of course, climate policies.
In line with the European Green Deal, the ECB must promote the reallocation of resources towards green investments, without deviating from its primary mandate of ensuring price stability. This reallocation is essential to close the funding gap for implementing the EU’s climate policies, estimated to be at least 400 billion euros annually.
Thus, the ECB and the NCBs can and must act complementarily to facilitate an orderly transition, reducing the systemic and financial risks associated with climate change. In this context, monetary policies stand out as an optimal tool to help correct market inefficiencies.
Operational tools that can be directed to incentivise the reallocation of financial resources towards green investments, while maintaining consistency with the mandates’ priorities, firstly include open market operations and the so-called “last resort” refinancing of banks. These are complemented by extraordinary tools introduced in response to the economic crises of the past 15 years: quantitative easing, which involves large-scale purchases of securities on the secondary market, and credit easing (large-scale medium- to long-term refinancing operations).
The European Central Bank and the transition: opportunities for 2025
In 2021, the ECB adopted the Roadmap of climate change-related actions, a document recognising the importance of integrating climate change into the core activities of the Central Banks. This initiative laid the groundwork for innovations such as the green tilt in the bond purchase programme and the introduction of tools such as climate stress tests. However, despite progress, the concrete effects of this strategy on monetary policy are still limited.
The revision of the monetary strategy scheduled for 2025 presents a unique opportunity to update the “Climate Roadmap”, by adopting measures that are fully aligned with the goals of the Paris Agreement.
Acting promptly is crucial to minimise the costs associated with inaction or delayed interventions, which are expected to far exceed those of immediate action.
Indeed, in recent years, Europe has made significant efforts to provide a solid foundation for implementing economic and financial policies aimed at achieving climate goals. In fact, the availability of data and tools has improved significantly. For example, the EU’s Sustainable Taxonomy provides a clear framework for identifying sustainable economic activities, while scientific and technological advances facilitate the implementation of more assertive policies. The ECB can leverage these tools to promote systemic change towards a more sustainable economy, helping reduce the systemic risks posed by climate change.
Proposals for monetary policy reform
The Manifesto, published on January 28, 2025, endorsed by 41 civil society organisations and accompanied by a letter signed by 20 international experts, proposes a series of measures to align the ECB’s monetary policies with climate objectives. The proposals put forward are in line with the views expressed by ECCO in its technical report “Monetary policy and climate transition: what can the ECB do for the Green Deal?” and apply to the four main monetary policy tools mentioned earlier.
Among the key measures suggested are:
- Refinancing operations: Offering banks preferential financing for key transition sectors, such as renewable energy, building renovation and other activities identified by the EU Taxonomy, by introducing a “green” programme of long-term refinancing operations (TLTROs – targeted longer-term refinancing operations) by the end of 2025, as has been done in the past.
- Updating the Eurosystem’s Collateral framework with a view to sustainability: The ECB uses collateral to protect itself from counterparties’ defaults when providing liquidity to banks. The “Collateral framework” determines which assets are eligible as collateral and the “haircuts,” or discounts, applied based on risk profiles. There is a need to update this framework, excluding assets linked to inherently unsustainable business models, such as fossil fuel industries and activities that threaten vulnerable ecosystems, as well as mechanisms to penalise companies with high climate and environmental risks.
- Asset purchases and monetary portfolio composition: The ECB can purchase several types of securities, including government bonds, supranational bonds, corporate bonds, covered bonds, etc. To contribute meaningfully to the goals of the Paris Agreement, the ECB should adopt an active approach to reallocating its portfolio, favouring sustainable assets and divesting from those tied to business models that are harmful to the climate and the environment. This requires the introduction of stringent exclusion criteria, thus avoiding supporting issuers of bonds that are engaged in activities that are structurally harmful to the environment. The creation of a structural portfolio dedicated to the transition should be a priority for introduction by the end of 2025.
The future decisions of the ECB will determine the EU’s ability to achieve a fair and orderly climate transition. The revision of the ECB’s monetary policy strategy in 2025, therefore, represents a critical step in addressing the challenges of climate change and seizing the opportunities offered by a sustainable economic system. Through targeted and ambitious monetary policies, the ECB can both contribute to Europe’s climate objectives and strengthen the economic and financial resilience of the Eurozone, making it more prepared and competitive.
Useful links
“4 years on, the ECB needs an updated climate and nature approach”, Open letter to the ECB Governing Council signed by 20 European experts
“Stability Through Sustainability”, Recommendations for the revision of the European Central Bank’s monetary policy strategy, signed by 41 European civil society organisations
“Monetary policy and climate transition: what can the ECB do for the European Green Deal”, Technical report by ECCO
“Climate risks and banks’ capital requirements”, Technical report by ECCO
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