Climate Will Be Bigger Financial Challenge than COVID-19, European Central Bank Executive Says

Climate change will be a far bigger challenge to national economies than the COVID-19 pandemic, European Central Bank executive board member Isabel Schnabel told Reuters in an interview last week.

And the pandemic itself points to a bigger role for central banks in confronting climate change, while helping to connect the dots between climate and monetary policy, Schnabel said.

“Climate change is probably the biggest challenge we are facing, much bigger than the pandemic,” she told the news agency. “Even though this health shock was entirely unrelated to monetary policy, it nevertheless has huge implications for monetary policy,” and “the same is true for climate change.”

While Schnabel has been a past skeptic of adding green bonds to the central bank’s portfolio, she told Reuters her views on that are “evolving”. The news agency says the ECB could also shape policy and practice by requiring banks to conduct climate risk assessments that would then affect their access to central bank funds. It could also support an EU “capital markets union” on green finance.

“There is the view that we should stick very closely to market neutrality,” Schnabel said. “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.”

Earlier this year, the European Union adopted a €750-billion pandemic recovery package and a €1-trillion, seven-year budget that established “green strings” for transition projects, including a 15-gigawatt renewable energy tender and support for green hydrogen development. But the plan also allowed a “caveat” for natural gas development, prompting concerns that officials were just using climate as a “pawn in the bigger negotiation” and touting an ambitious plan with insufficient enforcement.