The EU has set ambitious sustainability objectives over the past few years. In the field of financial market policies, one important element is the EU sustainable finance framework, which currently comprises over 20 pieces of legislation. These span foundational definitions relating to sustainable business activities (Green Taxonomy), corporate governance rules (disclosures), product and service standards (EU Green Bond, ESG ratings), as well as prudential reforms. As an increasing number of legislative interventions shape the emergence of the EU’s “green macrofinancial regime“, especially through EU sustainable finance policy, there is a strong need for increased policy coherence.
This essay therefore argues in favour of further integration of EU sustainable finance policies into the ECB’s operational framework, without undermining the ECB’s mandate and independence. This would support alignment of the financial actors’ expectations and incentives, thus contributing to goals of financial stability and aligning capital flows with the Paris Agreement.
To a certain extent, the ECB has already been recognising the relevance of the sustainable finance instruments for its policies. For example, the ECB has followed the Taskforce for Climate-Related Financial Disclosures (TCFD) in its reporting. It has likewise considered whether banks within the EU should disclose in accordance with the Corporate Sustainability Reporting Directive (CSRD). However, as the above-mentioned pieces of the EU sustainable finance package come into force, a more holistic approach is required to ensure coherence between EU legislators’ intervention in market regulation and the ECB’s policies.
This need for further policy coherence — and a commensurate level of ambition among policies — is partly articulated by the ECB in its Opinion on the Omnibus, which aims to reduce the scope of EU sustainable corporate governance rules. However, whilst streamlining sustainable finance rules might mitigate the inconsistencies, overlaps, and complexities of the current framework, the Omnibus package is unlikely to significantly ease administrative burden and risks undermining green investment and the management of climate-related risks.
Since the Sustainable Finance Framework and especially the CSRD and Corporate Sustainability Due Diligence Directive (CSDDD) constitute crucial inputs for the ECB’s activities in terms of monetary policy implementation, prudential supervision of credit institutions, financial stability, and statistical data collection, the burden alleviation should not come at the expense of the scope or ambition of the Sustainable Finance Framework. In other words, there are crucial interconnections between the Union’s Sustainable Finance Framework and the ECB’s activities that require coordination.
Even as the ECB recognises how the adequacy of its policies relies on the availability and quality of sustainability data, further action may enhance the coherence of EU policy implementation in this respect. For example, interest rates could be differentiated via a Green Targeted Longer-Term Refinancing Operation (Green TLTRO) based on the Taxonomy. Furthermore, the use of sustainability definitions included in the Sustainable Finance Framework by the ECB would not only contribute to the general coherence of the EU’s economic policy but also represent a necessary and important signal to market participants, who — even with acts such as the EU Taxonomy or EU Green Bond Standard in force — decry absence of adequate standards or market definitions.
Where the EU sustainable finance framework is oriented towards increasing transparency around climate change-related risk exposures, the integration of this approach into the ECB’s monetary policies would support adequate risk management and financial sector resilience. Such an approach would further enhance the effectiveness of policy intervention, whereas the absence of coherence between EU sustainable finance policies and the ECB’s monetary policy operations risks undermining the objectives of both.
On the Right Track to Integrating EU Sustainability Goals Into the ECB’s Policies?
Over the past few years, the ECB has already taken several steps to integrate climate and environmental considerations into its different activities. It has acknowledged that “market neutrality” approaches in monetary policy and financial frameworks negatively interact with sustainability targets. For instance, Executive Board Member Isabel Schnabel has recognised that the ECB’s monetary policy had a carbon bias.
Similarly, one of the conclusions from the ECB’s 2021 monetary policy strategy review was that climate change and transition policies are likely to affect the conduct of monetary policy and the ECB’s ability to deliver on its price stability mandate. For instance, climate change directly causes supply shocks through extreme weather events, and disorderly transition policies could have inflationary effects in the short to medium term.
In its 2025 monetary policy strategy review, the ECB reiterated its commitment to taking into account the implications of climate change for monetary policy and expanded this focus to include nature degradation. The Governing Council also noted that it may extend its policy horizon when supply shocks are present, signalling intent to adapt its approach to a period of supply-side volatility driven by climate change and other structural factors.
In July 2022, the Governing Council of the ECB decided to take further steps to include climate change into its monetary policy operations, leveraging various elements of the EU sustainable finance framework. First, the tilting of the ECB’s corporate bond holdings — that is, its alignment with the Paris Climate Agreement — would be based on an internal climate scoring that is strongly guided by the requirements for the EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks. The ECB also announced that it would limit shares of assets issued by high-carbon footprint entities that can be pledged as collateral by individual counterparties when borrowing from the Eurosystem and consider climate risk when reviewing haircuts applied to corporate bonds used as collateral. Moreover, the ECB announced it would make the eligibility of companies’ marketable assets and credit claims as collateral in Eurosystem credit operations dependent on whether the latter comply with the CSRD.
In March 2024, the ECB announced that the design of its operational framework will aim to incorporate climate-related considerations into structural monetary policy operations. The intent is that the operational framework ensures the effective implementation of the monetary policy stance and does not cause prejudice to the ECB’s primary objective of price stability.
Whilst these were steps in the right direction, the practical implementation of such policies remains at an early stage. The operationalisation of the 2025 monetary policy strategy offers an opportunity to further support EU policy coherence. There are several additional ways in which the expanded sustainable finance framework can and should be applied to the ECB’s activities in a manner that aligns with the central bank’s primary mandate and secondary objectives.
Improving Consistency Between the ECB’s Policy Operations and EU Sustainable Finance Policies
First, the ECB pursues the primary objective of maintaining price stability as set out in the first sentence of Article 127(1) of the Treaty on the Functioning of the European Union (TFEU). Following the Court of Justice, and more specifically its decision in the Case C-62/14 Gauweiler, climate change could also be deemed relevant for the ECB’s primary objective when it threatens to undermine price stability.
A legal basis to further integrate the Sustainable Finance Framework into the ECB’s activities can also be found in its secondary objectives. According to the second sentence of Article 127(1) TFEU, the ECB is to support the general economic policies of the Union without undermining the objective of price stability. The latter are laid down in Article 3 of the Treaty on the European Union (TEU) and include, amongst other elements, “full employment and social progress” and “the quality of the environment”.
Considering climate action among the secondary objectives, Frank Elderson stated that “it is irrefutable that the EU’s climate policy constitutes part of the general economic policies in the EU”. More concretely, Elderson describes how the sustainable finance framework creates an “ecosystem” of EU legislation that links nature degradation, the economy and the financial sector — and thus central banks and supervisors — and leaves no doubt that central bankers have the duty and tools at their disposal to take nature-related risks into account when exercising their mandate. The prioritisation of climate policy in the Union’s economic policy is also reflected in the Paris Climate Agreement and the European Climate Law (Regulation 2021/1119), which are both part of the Sustainable Finance Framework and translate the former into concrete obligations.
Furthermore, financial stability can be considered a precondition for price stability, transcending the delimitation between secondary and primary objectives, as per the Court of Justice of the European Union. Moreover, Article 11 TFEU states that “environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development”. Article 7 of the TFEU represents another transversal treaty provision stating that the activities and policies of the ECB must be consistent with EU law, including, for instance, the EU law on nature and biodiversity as well as other environmental legislation.
Whilst the ECB’s interference with the principles of an open market economy with free competition (third sentence of Article 127(1) TFEU), for instance via the differentiation between green and brown assets, must meet proportionality standards, such differentiation could be justified by EU standards such as the EU Taxonomy or the EU Green Bond Standard. As previously mentioned, the ECB seems to have “turned away from considering market neutrality as a binding legal instrument”.
Consequently, both the ECB’s primary mandate and secondary objectives provide ample justification for further integrating the EU’s sustainable finance policies, particularly those related to risk management, sustainability definitions, and corporate governance requirements, with the ECB’s activities. But what could such integration look like, and what elements must be considered?
Pathways for Further Integrating EU Sustainability Goals in the ECB’s Policies
To ensure that integration of EU sustainable finance policies with the ECB’s monetary policy activities enhances long-term policy effectiveness and supports EU sustainability goals and transition risk management, several considerations should be taken into account.
Beyond sustainability data, the ECB should also consider the appropriateness of consistently using the sustainability definitions under the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR). The mainstreaming of sustainability definitions, rather than their multiplication, would lead to an easier and more coherent implementation of the transition among market participants and EU institutions. In addition to increased coherence, endorsing the definitions of sustainability set out in the EU sustainable finance policy would also represent a crucial and necessary signal to market participants, supporting the credibility of the latter.
Taking the example of the tilting of the ECB’s bond holdings, the latter could be better aligned with the evolving EU sustainable finance framework. In the past, the ECB’s bond holdings were assessed using an internal climate score, which drew partly on sustainability disclosures associated with the EU Climate Transition Benchmark and the EU Paris-aligned Benchmarks. In addition, with the EU Green Bond Standard coming into force, the ECB should ensure that such instruments are adequately represented in its policies (for example, collateral policies), also in the context of transition risk management.
Furthermore, the ECB could rely on the EU sustainable finance policies to develop an approach to differentiating interest rates according to the climate change risk profile of the underlying asset. Among other factors, interest rate differentiation responds to the observation that contractionary monetary policy undermines long-term price and financial stability by scarring the economy’s productive capacity. For instance, the ECB’s contractionary monetary policy in response to the war in Ukraine and repercussions on the global economy was found to significantly impact the financing conditions of renewable energies.
Comparable effects were also found in the case of the United States, several Asian countries, and Iran. A differentiated rate shielding renewable energy investments, as in Japan and China, could be implemented via a Taxonomy-based Green TLTRO. Whether it is the EU Taxonomy or another element of the Sustainable Finance Framework, such as the EU Green Bond Standard, the ECB should explicitly consider the appropriateness of using existing regulatory definitions when assessing and integrating sustainability into its various activities.
Conclusion
The ECB’s opinion on the Omnibus package and the 2025 monetary policy strategy review confirmed the importance of the EU’s sustainable finance agenda for the ECB’s various activities. Further, the relevant policies introduced to accelerate financial sector climate change risk management and transition should inform the broader macrofinancial regime.
Ensuring integration of EU monetary policies with key pieces of the EU sustainable finance agenda, such as a Taxonomy- or EU Green Bond-aligned Green TLTRO, can be aligned with both the ECB’s primary mandate and secondary objectives. Such integration of the ECB’s activities with the Union’s sustainability goals is a critical step toward greater policy coherence, thus enhancing financial stability and aligning capital flows with the Paris Agreement.
Gaston Bronstering researches the role and influence of index providers for economic decision-making at the International Relations Department, LSE. He has worked as a researcher at the academic think tank Sustainable Finance Lab associated with the Utrecht School of Economics and experience and conducted research for the United Nations Environment Programme.
Agnieszka Smoleńska is a Senior Policy Fellow at the LSE Centre for Economic Transition Expertise (CETEx) leading the work on transition planning in the financial sector. She joined the Grantham Research Institute on Climate Change and the Environment as a Visiting Fellow in 2023.
David Barmes is a Policy Fellow at the LSE Grantham Research Institute, where he focuses on sustainable central banking, financial supervision, and macroeconomic coordination.
