Daily Management Review

Climate Change Is Bigger Economic Risk Than COVID-19 Pandemic


The European Central Bank cannot ignore climate risks even though it may appear to be “unrelated to monetary policy”.

Isabel Schnabel, a board member of the European Central Bank, said that the COVID-19 pandemic is clear example indicating the need for the central banks to come forward and take up “bigger role” in the battle against climate change even though it may initially appear to be “unrelated to monetary policy”.
Even though, the pandemic was initially only a “health crisis” which now have sent “economic shockwaves” across the world whereby “affecting every nation” as the central banks are forced to give “unprecedented support” to economic activity. While, climate change seems to pose a “bigger risk”, therefore the ECB needs to may attention to this while reviewing its policy framework. In Schnabel’s words:
“Climate change is probably the biggest challenge we are facing, much bigger than the pandemic”.
“Even though this health shock was entirely unrelated to monetary policy, it nevertheless has huge implications for monetary policy. The same is true for climate change and this is why central banks cannot ignore it.”
Schnabel further added that the ECB could use its “supervisory arm” to carry out a “climate risk assessment” as it could “affect their access to central bank funding” in case there is a “direct implication on collateral valuations”. She also argued that the central bank also needs to urge the European Union for adding a “green element to its long-delayed project” of setting up a “capital market union” which will focus on “green finance” as this could be a “competitive advantage” for the bloc.
Schnabel also said:
“There is the view that we should stick very closely to market neutrality. And there is the alternative view that markets are not pricing climate risks properly, so there is a market distortion and therefore market neutrality may not actually be the right benchmark.”
The ECB happens to the “biggest buyers of green assets” with twenty percent green bonds eligible for “its purchase” which leaves “little scope” for more to buy “under its current rules”.