Clean energy is under heavy fire from fossil fuel advocates, but a behind-the-scenes policy change at one of the world’s most important financial institutions means that green policies will be able to call on a powerful ally in the years to come.
Clean energy and climate policy are not in particularly rude health at the moment. In Europe, the Green Deal has been assimilated into a pro-industry credo, where simplification of environmental rules is a top political priority.
In the United States, the Trump administration is engaged in a bitter no-holds-barred crusade against renewable energy and climate legislation.
Elsewhere, like in China, clean power is on the rise, but fossil fuels still retain a stranglehold on energy production. Progress is visible but mitigated by adherence to the status quo.
One of the biggest adherents to the status quo, at least until now, is the financial system. Change is toxic to banks and investors, which crave certainty above all other things.
Given that climate change and the steps needed to tackle it are both the biggest agents of changes facing the modern world, green policies and financial policies are often a pretty poor fit.
But when their interests do align and when it is possible to bang the drum for decarbonisation and financial reform, the results are often far more widespread than policy changes in other sectors.
The European Central Bank announced this week that it will start applying a so-called climate factor to the corporate bonds financial institutions lodge with the bank in return for loans.
The ECB decision means that companies that are not aligning themselves with climate commitments, net zero pledges and all of the obligations laid down by the Paris Agreement will see their bonds devalued.
Essentially, the eurozone’s central bank will loan less money in exchange for bonds issued by companies that are not taking the energy transition seriously. It is a huge shift by the Frankfurt headquartered institution.
This is not an ideological shift by any means by the ECB, it is rather designed to safeguard the financial health of the euro and the wider financial system.
If or when these climate-risky bonds lose value, the bank’s own losses will be reduced. It will also make these bonds less attractive in the first place, so other financial institutions will be cautious about buying them.
That will obviously make it more difficult to borrow money. The knock-on effect of this on the energy transition will be pretty clear and, probably, pretty quick.
A popular pro fossil fuel talking point is that they are cheaper than renewables. In many cases, this is not true and if securing financing for gas plants, oil wells and coal mine expansion suddenly gets more expensive, then the writing really is on the wall.
What effect this will have on global financial institutions is difficult to gauge. The United States Federal Reserve is unlikely to follow suit anytime soon, given the political climate on the other side of the Atlantic.
However, on the other side of the Channel, the Bank of England may be spurred into action by what the ECB is doing.
The United Kingdom is making big strides forward on decarbonisation; for example, last year, the country’s supreme court ruled that fossil fuel projects need to factor in all the emissions that will be released by the burning of anything extracted.
That ruling has made waves around the world and is now routinely being cited in case law supporting legal challenges against new oil and gas fields.
It therefore seems logical that the monetary policy of that same country should align itself with other policies and the legal norms of the land.
There is still plenty of nuance to be established when it comes to the ECB decision though, as the climate factor that will be applied to collateral bonds still needs to be established.
Whether any potential loopholes will be written into that criteria remains to be seen and the climate factor will only kick in as of the second half of 2026, so there will not be an immediate impact.
After last week’s landmark ruling by the International Court of Justice on climate change, this is yet another structural win for climate action that makes the direction of travel for the energy transition even more certain.
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