INTERVIEWInterview with Börsen-ZeitungInterview with Yves Mersch,
Member of the Executive Board of the ECB and Vice-Chair of the
Supervisory Board of the ECB, conducted by Kai Johannsen and published
on 21 November 2020 21 November 2020
Mr Mersch, is it part of
the European Central Bank’s mandate to engage with the capital market
segment of green and sustainable finance?
The EU Treaties
require the ECB to give primacy to the objective of price stability.
If ECB’s engagement with the green and sustainable financial sector
were necessary for maintaining price stability in the euro area, it
would fall within the remit of our primary objective. I don’t think
that applies at present.
In addition, the ECB has what are
known as secondary objectives. Without prejudice to our primary
objective of price stability, we support the general economic policies
in the EU “with a view to contributing to the achievement of the
objectives of the Union”. One of these objectives is to work towards
“a high level of protection and improvement of the quality of the
environment”. This justifies why the ECB is also looking into
However, contrary to what some may argue, that
does not mean that the ECB is free to take the initiative and decide
itself how “a high level of protection and improvement of the quality
of the environment” is to be achieved. For good reason, that remains
the privilege of elected politicians.
What are the risks
facing green and sustainable finance over the coming years?
would see it as a risk if green finance degenerated into a pure
marketing tool. If investors want to make the world a greener place,
they need to know how their investments contribute to more
sustainability. To put it in technical terms, I see the risk of
informational market failures if information on the sustainability of
businesses and financial products is inconsistent, largely not
comparable and at times unreliable or even completely unavailable.
Definitions of what constitutes a sustainable investment are often
subjective and inconsistent. The EU taxonomy is a promising
initiative, albeit incomplete. Its practical usability remains a
challenge. Plans are also under way for widely applicable industry
What else is needed?
Better and more
standardised non-financial reporting will also be crucial. This is
essential for correctly pricing the risks. Sound reporting is the
cornerstone of appropriate risk management.
institutions, including banks, need to ensure they can identify at an
early stage, and deal with, the risks emerging from the effects of
climate change and a rapid transition to a carbon-neutral economy.
Only once these prerequisites are met can sustainable finance
prosper and have a tangible impact on the real economy. Otherwise
there remains a risk of “greenwashing” and of an unsustainable “green
bubble” detached from fundamental data.
The EU taxonomy for
green and sustainable finance is a complex system of classification
intended to give investors and providers of financial products
certainty as to what can be classified as green and sustainable. Is
this a masterstroke by the EU that will advance this market segment
and possibly also serve as an example for other countries and
The EU Taxonomy Regulation is important. A sound
classification system provides investors with valuable information for
their investment decisions. The taxonomy was designed with green bonds
in mind. Its application to other financial products may not be as
straightforward and the overall design might need to be adjusted.
Moreover, the system is indeed very complex.
that mean for risk assessment in practice?
I see a certain gap
between its envisaged objective and its practical usability.
However useful the taxonomy may be for green investment
decisions, it will not help in the risk assessment of economic
activities exposed to climate risk. Finally and more fundamentally,
the taxonomy is only one piece of the puzzle: granular data at the
corporate level are required in order for it to be usable.
we address these shortcomings, the EU can set an example for the
parallel processes now under way in other countries. We have one of
the most advanced frameworks for sustainable finance. The EU taxonomy
can be an important element in promoting the EU regulatory approach
abroad, and in strengthening the EU’s role as a global hub for
When do you expect financial markets and
market participants to be fully green and sustainable?
think that the entire financial sector will one day be green. There
are many industries that are neither clean nor dirty and they also
raise funding on the market. Moreover, I don’t think we can stop
climate change by choking off entire sectors of the economy. We should
rather create the right incentives through, say, fiscal policy
measures, including carbon pricing and other regulatory tools.
Finally, the financial sector can indeed help, but it can’t
save the planet on its own.
We are now transitioning towards
green and sustainable capital markets: what specific transition risks
do you see in this phase?
The transition towards a greener and
more sustainable capital market may lead to a repricing of assets. If
this adjustment happens abruptly, i. e. if the redirection of capital
proceeds in an unexpected or disorderly way, we talk about transition
However, compared with the potential economic losses
arising from climate risks, the transitory losses that may occur are
paltry. But individual banks could certainly be hit hard: the bulk of
exposures to the most energy-intensive borrowers are held by just a
few banks. In other words, a few banks have very high exposures.
Are the banks already providing sufficient disclosure on
specific risks that are neither green nor sustainable, i. e. largely
brown assets, and do you already incorporate these in the ECB’s
banking supervision? How far do the banks go in their disclosure and
do they go far enough for the ECB?
I see a need for further
action in that regard. It’s true that the disclosure of climate-
related risks has improved, but mostly the information is just not
detailed enough, and only seldom supported by quantitative data.
We will soon be publishing a “Guide on climate-related and
environmental risks”. The Guide sets out how, in our view,
institutions should take climate and environmental risks into
consideration in their business strategies, governance and risk
management frameworks and how these are to be disclosed. We looked at
the disclosure for last year from a sample of the institutions that we
supervise – more than half of them did not even meet the minimum
requirements set out in the Guide. In relation to this we will soon be
publishing a report on the disclosure of environmental risks of the
banks under our supervision.
Does that provide any first
lessons for the ECB?
Yes. That is why we will devote our 2022
stress test to the topic of climate change. This stress test should
not only be analytical and top-down, but, in the hope of a better data
situation, a better taxonomy and better standards, also enable a
meaningful bottom-up approach.
Are you concerned that a major
case of greenwashing could arise, which could trigger a chain reaction
and result in a sharp downturn in the financial markets? Are the
markets sufficiently forearmed against this, or in other words, are
they stable enough?
There is no doubt that greenwashing is an
issue, even if an improvement is in sight. The European Commission
will soon present a legislative proposal for an EU green bond
standard. However, a green bond does not necessarily tell us how green
a company is as a whole. The classification relates instead to
individual assets that these bonds are intended to finance. These
assets are only part of the company’s balance sheet, which could
indeed also include conventional assets with a bigger carbon
footprint. Thus, on their own, green bonds are not sufficient for a
greener real economy.
What would in your view be
A welcome Commission initiative concerns the
introduction of an EU ecolabel for financial products and in
particular for investment funds. This should allow retail investors
who are concerned about the environmental impact of their investments
to rely on a trustworthy and verified label and hence make informed
investment decisions. At the same time incentives could be created for
financial markets to develop more products with a reduced or positive
It remains a problem that markets may
not yet be able to correctly assess the fundamentals of green
financial products. This is for instance the case with green bonds,
where there are large differences in the extent to which the bond
proceeds are truly invested in green and sustainable projects.
How important are sustainability ratings? Do you already
deploy these ratings in your supervision? Are the ratings robust
enough for an appropriate estimation of risks and
The current environmental, social and governance
(ESG) ratings of banks do not reflect their lending to companies with
high carbon emissions. Similarly, they are also not an appropriate
measure of credit risk. These ratings are more concerned with social
Carbon emission figures could provide a better
proxy for the physical and transition risks to which companies are
An issue that comes up repeatedly is that each agency
uses different metrics for their sustainability ratings: the same data
are assessed or weighed in different ways. Should providers therefore
report several sustainability ratings or just one?
that ratings vary so much across providers is largely due to three
factors: first, the underlying raw data and calculation methodologies;
second, the methodologies used to compute the ratings; and, third, the
qualitative elements underlying each assessment. Therefore, providers
should present metrics and ratings in a transparent way so that
investors can understand them.
What is even more important is
that data gaps in the underlying data are closed. This brings us back
to disclosure, for which the taxonomy framework and reliable labels
for sustainable financial products – including an EU standard for
green bonds – are crucial.
Does the ECB deploy green and
sustainable investments in its fund management – of pension funds,
say? If so, what are the investment criteria, what kinds of investment
The pension funds are managed autonomously. The
management has undertaken to adhere to the United Nations Principles
for Responsible Investment and thus to include sustainability
In addition, we have increased the share of green
bonds in our own funds portfolio and will continue to do so in future.
We follow the Sustainable and Responsible Investment Guide for Central
Banks’ Portfolio Management from the Network for Greening the
Financial System, of which we are a member.
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