As climate risks mount, the ECB faces a test of its commitment to green finance.

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FRANKFURT — Christine Lagarde looks set to depart her role as president of the European Central Bank ahead of time. Frankfurt's green money focus risks going with her.

Lagarde is widely seen as the ECB's most prominent green advocate and quickly signalled her allegiance to the sustainability camp when she took over as ECB president nearly seven years ago. Hailed as a superb communicator, Lagarde was ready to speak on political themes, such as pursuing gender balance and fighting climate change, alongside the technical business of monetary policy — a marked contrast with her technocratic predecessor, Mario Draghi.

That is no longer guaranteed as the ECB’s six-person executive board faces a major reshuffle, with Lagarde rumored to leave before the end of her term in October next year and two other seats set to change before then, leaving a new board to focus solely on the gray world of monetary policy.

Adding insult to injury for monetary policy green advocates, Lagarde’s exit could also see Frank Elderson, her strongest climate ally on the ECB board, leave Frankfurt. If Klaas Knot, one of the two frontrunners to replace Lagarde, clinches the top job, Elderson faces having to step aside because both men are Dutch and the ECB board generally has only one member from each country.

Activists warn that the ECB's role in fighting climate change and making the eurozone’s economy more sustainable is under threat if the two green heavyweights leave.

There is “a real recognition” among NGOs that Lagarde played a “very important role” in the ECB’s push toward greener central banking, Reclaim Finance campaigner Clarisse Murphy said.

Under Lagarde, the ECB brought concrete climate policies into its day-to-day work of buying bonds, valuing collateral and managing its own assets. Climate considerations are also now part of the ECB's routine supervisory work, with the Bank issuing binding decisions to lenders and warning some of periodic penalties if they fail to address deficiencies.

The political winds have shifted since Lagarde arrived in Frankfurt in 2019, however. Those were the days when being green would get you elected on the campaign trail. The European Commission even proposed sweeping rules to curb greenhouse gas emissions in its Green Deal.

Since then, two wars, a pandemic and rising energy costs have changed the political landscape from greening the economy to boosting growth and cutting red tape. Brussels has since dismantled large swathes of its climate policies.

With or without Lagarde, green advocates argue that EU treaties require the Frankfurt-based central bank to help the EU achieve its wider goals as long as it doesn't impact the central bank's mandate for keeping prices stable. That includes greening the economy to help shield the EU from energy shocks and maintain price stability.

With a nod to energy price-driven inflation shocks, advocates argue that helping the green transition is also at the very heart of the ECB's price stability mandate.

Critics, meanwhile, counter that it's politicians, not central bankers, who should decide which industries get cheaper financing. If anything, green policies threaten the ECB’s independence and its mission to keep inflation at 2%.

Beyond raising awareness of climate change and its implications for financial and economic stability, Lagarde addressed the issue in the bank’s 2021 strategy review. The Bank now officially recognizes that “climate change has profound implications for price stability.”

Elderson, meanwhile, made climate concerns a key focus in his role as vice-chair of the ECB’s supervisory arm, which oversees the eurozone’s biggest banks.

“Elderson’s departure would be a major loss for central bank communications that clearly articulate the impact of the climate crisis on the ECB’s mission,” said Greenpeace financial expert Mauricio Vargas.

Experts don’t expect the ECB’s Governing Council to overturn existing green policies that they’ve already signed off on, especially after the summer heatwaves. But they warned that much-needed progress could stall under new leadership. The question is whether the new ECB president will be content to leave things as they are today instead of implementing more ambitious policies.

More is urgently needed, campaigners said. Banking supervision aside, much remains to be done to green monetary policy operations.

“Overall, they implemented some effective measures to address climate risks at a banking level but missed the chance to highlight and support the benefits of decarbonisation for price and economic stability, and to act accordingly,” Vargas said.

One key example is the launch of long-term lending operations that offer more favorable conditions to banks investing in the energy transition. “The measure would make particular sense now, given interest rates have gone up again, negatively impacting investment in renewables,” Reclaim Finance’s Murphy said.

Yet, the political environment for pushing through such changes has become more challenging. Murphy cautioned that a swing away from green policies outside the central bank could leave Lagarde’s green legacy under threat.

“I think there’s definitely a risk that the ECB’s next president will be satisfied with what has been achieved so far and consider the rest to be the government’s responsibility,” she said. “That would be a very dangerous approach, because central banks have tools that governments don’t.”

The ECB declined to comment for this story.

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