Years of subdued inflationary pressure and weak demand have already exhausted the conventional policy space across the industrialised world. And although central banks have successfully relaxed the constraints of the zero lower bound, the risks to financial stability and other side effects emerging from a protracted and intense usage of non-standard measures are likely to rise. For these reasons, central banks cannot just stand on the sidelines when it comes to climate change. And the COVID-19 pandemic has taught us that monetary and fiscal policies are most effective when they complement each other. This will also be true in the fight against climate change. I see three major avenues through which the ECB, and central banks more generally, can contribute. The first is through our involvement in defining rules and standards, and in promoting research for a better understanding of the implications of climate change for financial markets and monetary policy. [11] The ECB is a member of the Network for Greening the Financial System (NGFS) and has contributed actively to the development of the EU taxonomy of sustainable economic activities. These activities are at the same time instrumental for promoting capital markets union. The second way in which the ECB can contribute is by ensuring that we ourselves are an environmentally mindful and responsible investor. We are doing this already for our pension fund investments and are now exploring options for other non-monetary policy portfolios.
During this period, we need to find a way to mitigate the risks of “greenwashing” so as to channel funds to where they are most effective. Second, a green taxonomy needs to be complemented by a taxonomy for environmentally harmful activities so that investors can identify transition risks more easily and hence also price risk differentials more effectively. [8] And third, the taxonomy requires granular data for it to be useable. In the absence of corporate-level information, the taxonomy cannot be put into use and many metrics will prove useless. This is clearly visible when looking at environmental ratings for financial products: if available, they are often inconsistent, incomparable and at times unreliable – in many cases reflecting the absence of granular data or the large discretion in the construction of such indicators. Indicators from different sources often display a very low correlation (see figure 8). Figure 8 Financial market pricing of climate risk: correlations of bank environmental scores by Bloomberg and Refinitiv  Source: ECB Financial Stability Review, November 2019 based on Bloomberg, Refinitiv EIKON, S&P Global Market Intelligence and Dealogic. Notes: The Bloomberg and Refinitiv environmental scores give values between 0 and 100, whereby a higher value indicates a better performance in terms of environmental variables. The full unbalanced sample consists of 49 banks and 23 insurers in the EU and the United States.