Bundesbank President Jens Weidmann has spoken out in favour of central banks taking adequate account in their risk management of climate-related financial risks that could arise from their monetary policy operations. He argues it is therefore legitimate to expect better information to be provided. “The Eurosystem should consider only purchasing securities or accepting them as collateral for monetary policy purposes if their issuers meet certain climate-related reporting obligations,” said Mr Weidmann in a speech given at the European Banking Congress in Frankfurt am Main. 

He also proposed that the Eurosystem consider using ratings issued by rating agencies only if they adequately incorporate climate-related financial risks. By taking such measures, the Eurosystem could help foster market transparency and standards at rating agencies and banks. Central banks could thus act as a catalyst for “greening” the financial system and support climate policies in the EU.  

Adequately incorporate climate-related financial risks into risk management

Climate change and climate policy could give rise to financial risks that may affect not just individual banks or investors but the entire financial system as well. “In our role as prudential supervisors and guardians of financial stability, we have to ensure that credit institutions adequately incorporate financial risk into their risk management, including those financial risks that are climate-related,” Mr Weidmann stated. Central banks also have to practise what they preach, he said, arguing that they owe it to European taxpayers to keep the financial risks that arise from their monetary policy operations in check. “All the more so since our financial assets can be just as exposed to financial risk as those of commercial banks,” Mr Weidmann noted. 

Guiding principle of market neutrality in private bond purchase programmes

Mr Weidmann took a critical view of suggestions that monetary policy should be used to actively pursue climate policy objectives. In response to calls for the Eurosystem’s purchase programmes to exclude securities if their issuers generate high carbon dioxide emissions, Mr Weidmann said “it is not the task of the Eurosystem to penalise or subsidise certain industries”. To be effective, the asset purchase programmes need to be broad-based, he continued, which is why the principle of market neutrality is adhered to. Correcting market distortions often has intricate distributional implications, Mr Weidmann pointed out, arguing that “such decisions need strong democratic legitimacy and are a matter for governments and parliaments” – they have the right tools at their disposal and also have the democratic authority to use those tools. 

Do not undermine independence

In his speech, Mr Weidmann warned that an active role in climate policy could undermine central banks’ independence and, ultimately, jeopardise their ability to maintain price stability. According to Mr Weidmann, the Eurosystem was not granted independence to make the decisions that politicians are unwilling to make themselves; central banks are independent because it makes them better equipped to safeguard price stability. In the long run, he concluded, price stability is the best contribution monetary policy can make to our overall welfare.