ECB must take responsibility and stop loans that harm nature, say WWF and Positive Money

Posted on October, 09 2024

The European Central Bank (ECB) must take far broader heed of the environmental impact of assets used by banks to secure loans, according to a new report “Nature’s Nudge: The role of collateral frameworks in the transition towards a sustainable economy”, launched today by WWF’s Greening Financial Regulation Initiative (GFRI) and Positive Money.

The ECB, through its collateral framework, has the power to shape the behaviour of market actors, and is being encouraged to expand its focus beyond climate risk, to include nature loss when making lending decisions to banks.

“In the past, the ECB has failed to take an active role in developing a climate- and nature-positive collateral framework. With biodiversity degrading and a looming climate emergency, we no longer have the luxury to ignore this powerful tool”, says Chiara Pass, Sustainable Finance Policy Officer at WWF European Policy Office.

In order to effectively tackle environmental challenges, the ECB should:

set stricter rules for the types of assets that are accepted as collateral;
limit the amount of highly carbon-intensive or environmentally harmful assets that banks can use
make it less attractive for banks to finance companies pursuing environmentally damaging activities, and which are not on a science-based transition path, and which are not on a science-based transition path, by applying higher haircuts (reductions in the value that the ECB accepts for riskier assets)

The report uses concrete examples from France, where data from the Banque de France shows that certain companies from specific sectors including food, beverage, energy and banking are simultaneously victims and major contributors to environmental degradation.

Its findings show how the food and beverage sector, for example, is affecting a freshwater area totaling 3,494 square kilometres — roughly equivalent to the size of the island of Majorca - and land areas equivalent to 58,735 square kilometres - that is greater than the size of Croatia. This, in turn, can potentially constitute high risk for the financial system.

Also, in 2021 the total induced carbon emissions (scope 1,2 and 3) of the energy sector studied in the paper, equalled 360 million tonnes of CO2 - that is 40 million tonnes more than the carbon emissions of the entire country of Poland.

As is known, nature loss and climate change exacerbate each other and should be considered as equally important financial risks in the ECB´s collateral framework.

Uuriintuya Batsaikhan, Head of Research at Positive Money Europe and a co-author of the report, said:

“Within the Eurosystem, Banque de France is considered a climate champion. Our report underscores the urgent need for a reform that goes beyond climate risks alone. We must address the full spectrum of environmental concerns, including nature degradation and biodiversity loss. The ECB, as the collateral rule setter, and as a party to the Paris Agreement, should lead a radical revision of its lending practices. For instance, by reducing the value given to dirty assets the ECB has a real opportunity to send a clear message that environmentally destructive practices have no place in our economy.”

The ECB's collateral framework is not aligned with green targets, currently including about €250 billion in high-carbon assets.

The WWF and Positive Money report reinforces recent claims by Frank Elderson, Member of the Executive Board, and Vice Chair of the Supervisory Board of the ECB on 6 September 2024 that ‘time is running out to prepare for the materialisation of nature-related risks’.

As per its Climate and Nature plan 2024-2025, the ECB is set to review its collateral framework in the coming months as part of its Roadmap covering all Eurosystem central banks, opening up the opportunity for the ECB to consolidate its contribution to a net zero, nature positive economy.

The ECB is being encouraged to expand its focus beyond climate risk, to include nature loss when making lending decisions to banks.

© WWF