Interview with Frank Elderson, Member of the ECB Executive Board and Vice-Chairman of the ECB Supervisory Board, conducted by Jonathan Wittemann on January 29, 2024
February 3, 2024
The newspaper mentioned and quoted his speech in the preface to the interview. September 2023 and November 2023 It ends with a reference not only to the interview itself, but also to the sanctions that the ECB may impose and appropriate and appropriate requirements for bankers.
For a supervisor charged with evaluating bankers, those words sound quite threatening. What happens if the ECB decides that bankers are inadequate on climate change?
We clearly have the advantage of being able to examine the inner workings of every bank. And while no single bank currently meets all our expectations, we see a lot going right at banks in the area of climate risk. But I don’t think there are any banks that are completely ignoring climate risks. If something like this happens in the future, there will come a moment when you have to ask yourself whether the people at the helm are still up to the task.
How do banks put the economy at risk by underestimating climate change?
For example, through credit risk. When banks lend money to the agricultural sector, where climate change leads to reduced revenues, there is an increased risk that the loans will not be repaid. Alternatively, you can take out a home loan. Credit risk also increases when banks lend to homes located on land that is at increased risk of flooding.
There are also transition risks. In other words, governments can set rules to combat climate change. For example, in the Netherlands, only office buildings with energy label C or higher can be rented. Imagine if a bank lent money to a company renting out offices without a valid energy label. This will again exacerbate credit risk. Or what if diesel cars were banned in Amsterdam? If companies don’t prepare for this in time, investors will also be vulnerable.
And then there’s the legal aspect, Elderson added. Dutch environmental group Miludefensi has taken ING to court, accusing it of contributing to the climate crisis through billions in loans to polluters. Miljudefense claims that through these loans, ING emits the same amount of greenhouse gases as all 10 million Swedish citizens. Elderson: “We have already been reminding banks for years that it is important that legal risks are also properly identified and managed.”
You say that climate change also affects price stability. How exactly?
Let’s take the summer of 2022 as an example. Record heat has reduced crop yields. As a result, food price inflation rose by 0.8 percentage points over the subsequent 12 months, according to the ECB’s research. Or consider the drying up of the Rhine at a time when Germany’s GDP was measurably lower. Or the floods in Slovenia last August. The damage to the Slovenian economy is estimated at 5% of GDP.
But also look at the energy transition. This could increase demand for metals to make batteries and other goods, driving up prices for all kinds of goods. All of these are important to the ECB because they affect price stability.
Not everyone sees it that way. Critics have questioned why the ECB does not leave climate policy to elected politicians.
Agree. And that’s what we’re doing, leaving climate change policy to politicians. But of course we look across the fence at what climate legislation politicians create and take into account the consequences of those rules as we carry out our mandates.
Alongside our first objective of price stability, the second objective that we must pursue under the EU Treaties, namely support for the economic policy of the European Union, is important, provided it does not endanger price stability. Don’t forget that. This therefore also applies to the European climate change plans agreed by elected politicians in the past few years.
The treaty also includes all sorts of other goals for the ECB to promote, such as peace, free trade, gender equality and the eradication of poverty. We haven’t heard much from the ECB about these things.
Of course, we also asked ourselves questions such as: Who are we to choose between these goals? And for that very reason, we don’t. Because we see climate policy, including economic policy, as a top priority in Brussels and in the EU. There’s the Paris Agreement, the European Climate Act, the European Green Deal, etc. Some of the other issues you mention are very laudable, but politically they are lower priorities. It is therefore no surprise that the ECB is pushing ahead with goals that have been prioritized by the parliamentarians themselves and have set clear goals and deadlines.
In recent years, the inflation rate has often exceeded the target of 2%. When you think about it, are you biting off more than you can chew?
I think it’s a misconception that we have to choose between price stability and climate risk. How can we ignore that floods in Slovenia cost 5% of national income? How can we ignore rising food prices when we know temperatures will continue to rise for decades to come? Even if we don’t care about the climate at all, we would be defeating our mission if we stuck with this issue. And as we have shown for almost the past two years and as we showed last week, we are determined and on track to get inflation back to our 2% target.
Meanwhile, Federal Reserve Chairman Jerome Powell has taken an “everybody’s job” attitude.
Agree. But monetary policy needs to be adjusted to the insight that we can no longer understand the financial system if we ignore the climate and natural crises and governments’ transition plans. They want to move to a net-zero economy in 2050. Overall, this means no more greenhouse gases are added to the atmosphere. We have been closely monitoring the oil market for decades because energy prices are highly linked to monetary policy. And now we are seeing the world make its entire energy economy more sustainable. So is it really considered outside of our remit to try to deeply understand this change and act on these insights?
Was Mr. Powell’s understanding wrong??
I can completely relate to what he said, insofar as we consider our work to include everything related to price stability. If you look at our mission, there is no way to come to any other conclusion.