Interview with De Volkskrant

Interview with Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, conducted by Jonathan Witteman on 29 January 2024

3 February 2024

In its introduction to the interview, the newspaper refers to and quotes from speeches of September 2023 and November 2023 as well as from the interview itself, ending with references to the sanctions that the ECB can impose and the fit and proper requirements for bankers. 

Coming from a supervisor charged with assessing bankers, those words sound quite threatening. What happens if the ECB finds a banker inadequate on climate?

We obviously have the advantage of being able to inspect the inner workings of all banks. And we see that a lot is going well at banks in the area of climate risks, even if no single bank has currently met all of our expectations. But I don’t see any bank completely ignoring climate risks either. Should this happen in the future, a moment would come where we would have to ask ourselves whether the people at the helm are still fit for their task. 

How do banks endanger the economy by underestimating climate change?

Through credit risks, for example. When banks lend funds to the agricultural sector, where climate change leads to lower revenues, then the risk heightens that those loans are not repaid. Or take mortgages: if banks finance houses on sites that are increasingly prone to flooding, credit risk will rise too.

There is also a transition risk, in other words, governments can set rules to counter climate change. In the Netherlands, for example, you can only let out office buildings that have energy label C or higher. Imagine if a bank has lent funds to a business letting out offices without a valid energy label – that would again exacerbate the credit risk. Or what if cars running on diesel were no longer allowed in Amsterdam? If companies don’t prepare for this in good time, their investors will also become vulnerable.

And there is also a legal side, Elderson adds. The Dutch environmental organisation Milieudefensie has brought ING before the court on the grounds that the bank has made itself complicit in the climate crisis through its multi-billion loans to polluters. Through those loans, ING is emitting the same amount of greenhouse gases as all ten million Swedish citizens collectively, Milieudefensie claims. Elderson: ‘We have been reminding banks already for years that it is crucial for them to properly identify the legal risks too and control them'.

You say that climate change also affects price stability. How exactly?

Take the summer of 2022. The record-breaking heat caused lower crop yields. ECB research shows that, as a consequence, the food price inflation over the following twelve months was 0.8% point higher. Or think of the drying up of the Rhine back then, which resulted in a measurable decline in German GDP. Or of the floods in Slovenia last August, of which the damage to the Slovenian economy is estimated at 5% of GDP.

But also look at the energy transition, which is creating a high demand for metals to make batteries and other goods, possibly pushing up the prices for all kinds of commodities. All of this affects price stability and is hence relevant for the ECB.

Not everyone sees it that way. Critics ask why the ECB doesn’t leave climate policy to elected politicians.

I completely agree. And that’s what we are doing – leaving climate policy to the politicians. But of course we also look over the fence to see what climate legislation politicians draw up and we take the consequences of those rules into account when exercising our tasks.

Don’t forget that alongside our primary objective – price stability – there’s also a second objective that we must pursue under the EU Treaties as long as this doesn’t endanger price stability: supporting the economic policies in the European Union. This therefore also applies to the European climate plans agreed on by elected politicians over the past few years.

In the Treaties there are also all kinds of other objectives the ECB is supposed to promote, such as peace, free trade, gender equality or ending poverty. You don’t hear as much from the ECB about those.

Of course we’ve also asked ourselves that question: who are we to choose between these goals? And for precisely that reason, we don’t. Because we see that climate policy is a top priority in Brussels and in the EU countries, including in the economic policies. There’s the Paris Agreement, a European Climate Law and the European Green Deal – whereas some of the other agendas you’re referring to are very laudable, but politically have lower priority. Therefore it’s not surprising that the ECB is promoting the objectives that the legislators themselves are prioritising, and for which they set clear targets and deadlines.

In recent years inflation has often been above the 2% target. With that in mind, aren’t you biting off more than you can chew?

I think it’s a misconception that we would have to choose between price stability and climate risks. How can we ignore that floods in Slovenia caused 5% of national income in damages? How can we ignore rises in food prices, when we know that temperatures will continue to rise for decades to come? Even if we didn’t care one iota about the climate, we would fail in our mandate if we stuck our heads in the sand on this issue. And as we’ve shown for almost the past two years and demonstrated again last week: we’re determined to bring inflation back down to our target of 2% and we’re making good progress.

Meanwhile the head of the Federal Reserve, Jerome Powell, takes the attitude “every man to his trade”.

I completely agree. But monetary policy then needs to be tailored to the insight that we won’t be able to understand the financial system anymore if we ignore climate and nature crises and governments’ transition plans. They want to move to an economy that’s net zero in 2050, meaning that on balance we wouldn’t be adding greenhouse gases to the atmosphere anymore. We’ve been following the oil markets closely for decades, because energy prices are highly relevent to our monetary policy. And now we see the world making its entire energy economy more sustainable. Is it then really supposed to be outside our mandate to try to understand this change in depth and to act according to these insights?

So has Powell got it wrong?

I can totally relate to what he said, as long as you see our job as including everything relevant for price stability. If you look at our mandate, there’s no way you can reach any other conclusion.