Europe’s Central Banks Ramp Up Support for Greener Economy

(Bloomberg) -- Europe’s central banks are ramping up their efforts to support green finance as authorities contemplate how to fight climate change while rebuilding their economies after the pandemic.

The latest initiative includes a fund launched by the Bank for International Settlements for green-bond investments by central banks. The European Central Bank committed to buy into the initiative on Monday, and announced it will form a climate change center to coordinate work on the topic within its own institution.

“A central bank that is responsive to the needs of citizens -- both now and in the future -- has a duty to be mindful of the demands of sustainable development in order to ensure stability in all its forms,” ECB Executive Board member Fabio Panetta said in a video conference.

Some policy makers are cautioning though that central banks must find ways to tackle the challenge without compromising their monetary-policy tools. Bundesbank President Jens Weidmann warned that favoring green securities in the ECB’s bond-buying programs, for instance, could lead to conflicts of interest, or make the economy’s green transition reliant on inflation developments.

Central banks across the world have started to recognize the importance of climate change for the economy and their own policies, as natural disasters occur more frequently and threaten to disrupt activity and prices. The coronavirus crisis has provided an opportunity to devise policies that reshape economies with a focus on sustainability.

The BIS’s euro-denominated fund follows a U.S. dollar-denominated one in 2019, and brings the overall amount of green-bond investments managed by the institution -- a forum for monetary authorities -- on behalf of central banks to about $2 billion.

“The funds promote green finance through sizable investments in environmentally-friendly projects such as renewable energy production and energy efficiency, and support the adoption of best market practices and reporting standards to deepen the green bond market,” the BIS said in a statement.

The ECB said it will use part of its own-funds portfolio to invest in the new fund, and is assessing how it can support the European Union’s economic policies, which aim to create the world’s first climate-neutral continent by 2050.

”We recognize that our active role in some markets can influence the development of certain market segments,” ECB President Christine Lagarde said in a speech on Monday. “The ECB raised the share of green bonds in its own funds portfolio to 3.5% last year and is planning on raising it further as this market is expected to grow in the coming years.”

(Updates with Weidmann comments in fourth paragraph.)