Abstract
Greening the European Central Bank (ECB) has been a highly debated subject in the Eurozone/EU, featuring in the ECB monetary policy strategy review and the ECB Climate Change Action Plan. This is part of a worldwide trend towards ‘sustainable central banking’. This article focuses on the accountability of the ECB as a European institution, which enjoys a very special position in the EU legal framework, with a defined mandate conferred onto it by the Treaties (TEU and TFEU). The question at heart is, first, whether the existing normative framework allows an interpretation and understanding of the ECB's mandate to incorporate sustainability goals, and second, how sustainability objectives can be operationalized in the actual conduct of monetary policy. Whether and to what extent the ECB objectives and tasks can be ‘greened’ depends also on the possibility of integrating such an augmented mandate with adequate accountability requirements. Building on the concept of accountability and the framework of ‘accountable independence’ of the ECB, the article considers the relationship between accountability and greening the ECB, with an emphasis on the monetary policy responsibilities.
Keywords
Introduction
Greening the European Central Bank (ECB) has been a highly debated subject in the Eurozone/EU until relatively recently, featuring in the ECB monetary policy strategy review 1 and the ECB Climate Change Action Plan. 2 This is part of a worldwide trend towards ‘sustainable central banking’. 3 However, with the return of inflation, which far from being a ‘transitory phenomenon’ became entrenched in the EU, UK and USA (2021-2023), central banks are focusing again on their primary mandate. And they are doing so against an evolving and complex economic and geopolitical outlook (with the wars in Ukraine and the Middle East reigniting concerns about political stability and energy security, while the banking troubles in the US and Switzerland in 2023 providing a timely reminder that financial stability cannot be ignored) that evidences the tension between ‘green policies’ and other objectives, including also debt sustainability.
‘Greening’ (a shorthand for the fight against climate change) is undoubtedly a task that society and all political institutions must confront. The shift to net zero will entail systemic changes across all parts of the economy. Political bodies and institutions nationally and internationally must determine which institution and body is to address which aspects of greening the economy within their responsibility. 4
Against this background, this article focuses on the accountability of the ECB as a European institution, which enjoys a very special position in the EU legal framework with a defined mandate conferred onto it by the Treaties (TEU and TFEU). Following this introduction (section 1), we explore in section 2 the meaning of greening monetary policy. The question at heart is first, whether the existing normative framework allows an interpretation and understanding of the ECB's mandate to incorporate sustainability goals, and second, how sustainability objectives can be operationalized in the actual conduct of monetary policy. Whether the ECB may pursue sustainability objectives within its policies is not only answered by looking at the governing law of the ECB as laid out in the Treaties and in the Statute of the European System of Central Banks and of the European Central Bank (ESCB Statute), but also at the wider legal framework, encompassing institutional requirements, whereby the ECB is one actor among other EU institutions, bodies and the Member States, which enjoys independence and therefore requires accountability mechanisms to preserve democratic legitimacy, 5 while fully respecting the institutional set-up of the Economic and Monetary Union (EMU). This institutional framework ensures that each institution and body exercises the competence it is endowed with within a political system set up by the EU Treaties and established by the democratic processes in the Member States.
The question of whether and to what extent the ECB objectives and tasks can be ‘greened’ depends also on the possibility to integrate such an augmented mandate with adequate accountability requirements. Building on the concept of accountability and the framework of ‘accountable independence’ of the ECB as outlined in section 3, our article considers in section 4 the relationship between accountability and ‘greening’ the ECB, with emphasis on the monetary policy responsibilities. We contend that accountability mechanisms need to continue to evolve in order to keep pace with the challenges arising from the actual or potential greening of monetary policy and that this is a prerequisite for the legitimacy of the ECB as an independent institution. We provide a roadmap for how the ECB should account for climate change in the conduct of monetary policy and emphasize the role of the European Parliament in this regard.
Greening the monetary policy of the ECB
In this section we consider the ‘greening’ of monetary policy, the basic task par excellence of the ECB, clearly enshrined in Article 127(2) TFEU. We leave aside banking supervision (prudential supervisory responsibilities were transferred to the ECB with the advent of Banking Union), the broader agenda of greening EU banking regulation, 6 and macro-prudential policy (a task that the ECB shares with national authorities and the European Systemic Risk Board under a complex arrangement that exceeds the scope of our study). We also leave aside other tasks of the ECB, notably note issue (a very relevant debate with the proposed digital euro), operation of payment systems and management of official foreign reserves.
On 8 July 2021, the ECB announced a new monetary policy strategy as a result of its latest strategy review launched in January 2020. 7 One cornerstone of the new monetary policy strategy is the ECB's Climate Change Action Plan. 8 This action plan to incorporate climate change and environmental sustainability considerations into the monetary policy framework is situated in the broader context of the EU's ambitions to combat climate change and provide for a CO2-neutral environment encapsulated in its Green Deal. 9
As part of this Climate Change Action plan, on 4 July 2022, the ECB announced it would take further steps to incorporate climate change considerations into its monetary policy operations. 10 The cornerstones of these measures are based on restructuring the corporate bond holdings, changes in the collateral framework including climate-related disclosure requirements for collateral, and risk assessment and management.
First, the Eurosystem wants to change the allocation of its corporate purchases under the Corporate Sector Purchase Programme (CSPP) in order to gradually decarbonize its corporate bond holdings. The ECB will use so-called tilting measures in order to increase the share of assets on the Eurosystem's balance sheet issued by companies with a better climate performance compared to those by companies with a poorer climate performance through the reinvestment of the sizeable redemptions expected over the coming years. The ECB intends to measure climate performance with reference to lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate-related disclosures. The objective of this greening of corporate bond holdings is to mitigate climate-related financial risks on the Eurosystem balance sheet and to incentivize issuers to improve their disclosures and reduce their carbon emissions. Yet, the volume of corporate bond purchases shall still be determined solely by monetary policy considerations.
Second, concerning the collateral framework, the Eurosystem intends to limit the share of assets issued by entities with a high carbon footprint that can be pledged as collateral by individual counterparties when borrowing from the Eurosystem. Again, this revised collateral framework intends to reduce climate-related financial risks in Eurosystem credit operations. Additionally, the Eurosystem plans to consider climate change risks when reviewing haircuts applied to corporate bonds used as collateral.
Third, the Eurosystem plans to enhance its climate-related disclosure regime for collateral. Marketable assets and credit claims from companies and debtors will only be accepted as collateral in Eurosystem credit operations if they comply with the Corporate Sustainability Reporting Directive (CSRD) 11 . Since a significant proportion of the assets that can be pledged as collateral in Eurosystem credit operations (as asset-backed securities and covered bonds) do not fall under the CSRD, the Eurosystem will nevertheless assess the climate-related financial risks for those assets as well.
Fourth, within its risk assessment and management, the Eurosystem aims to strengthen its risk assessment tools and capabilities to better include climate-related risks. To improve the external assessment of climate-related risks, the Eurosystem will ask rating agencies to be more transparent in how they incorporate climate risks into their ratings and to be more ambitious in their disclosure requirements on climate risks.
In its Press Release on the ECB's actions to fight climate change, the ECB stressed that the envisaged/proposed ‘measures are designed in full accordance with the Eurosystem's primary objective of maintaining price stability. They aim to better take into account climate-related financial risk in the Eurosystem balance sheet and, with reference to our secondary objective, support the green transition of the economy in line with the EU's climate neutrality objectives. Moreover, our measures provide incentives to companies and financial institutions to be more transparent about their carbon emissions and to reduce them.’ 12 The question is whether and to what extent this statement holds true in the light of the monetary policy objectives.
The monetary policy framework
The objectives set forth in Article 127 TFEU, 13 the general principles of EU law and the Union's environmental objectives in Articles 3(3) TEU and 11 TFEU form the monetary policy framework of the ECB. 14
The principle of conferral enshrined in Article 5(1) and (2) TEU demands strict adherence to the ECB's nuanced mandate to preserve the intricate division of competences between the EU and its Member States. Article 127(1) 1 TFEU declares the maintenance of price stability as the primary objective of the ECB in very clear terms: ‘The primary objective of the European System of Central Banks (hereinafter referred to as “the ESCB”) shall be to maintain price stability.’ The secondary objective (in line with the tradition of the Bundesbank) is defined with reference and deference to the primary objective. This ranking is fundamental in the design of the accountability mechanisms for the ECB tasks. Article 127(1) 2 TFEU states: ‘without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union’. 15
In a ‘cascading effect’, by referring to Article 3 TEU, the Treaties embed the ECB within the general framework of the EU and bridge the gap between the specific provisions of the Monetary Union and the general objectives of the EU. The decision of the CJEU in the OLAF case, 16 which subjects the ECB to the general framework of EU law, is consistent with this interpretation. The ECB shall contribute to the achievement of these objectives, one of which is to ‘work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment’ (Article 3(3) TEU). Article 3 TEU formulates goals which all EU institutions, including the ECB, have to take into account and which serve as guiding principles when interpreting, conducting and implementing EU policies. 17 Dogmatically, Article 3 TEU and its objectives assume as a precondition that competences have been transferred to the Union. 18 Article 3(6) TEU clearly states: ‘The Union shall pursue its objectives by appropriate means commensurate with the competences which are conferred upon it in the Treaties.’ 19 Article 7–17 TFEU contain so-called cross-sectoral clauses, which have to be taken into account when implementing any EU policies. 20 Article 11 TFEU serves as such a cross-sectoral clause with regard to the environmental objective in Article 3(3) TEU. 21 While Article 11 TFEU allows and demands for an interpretation and implementation of primary and secondary EU law to incorporate sustainability objectives, 22 it cannot serve as a basis of competence itself. 23 Therefore, while the ECB has to take environmental considerations into account when implementing its monetary policy, the specific measures in question have to remain within the competence conferred on the ECB by Article 127 TFEU. 24 Neither Article 3 TEU nor Article 11 TFEU can be used to expand the competence structure enshrined in Article 127 TFEU. 25
With regard to the ECB's contributory task in the field of financial stability, 26 while other central banks have been granted a clear financial stability mandate in the aftermath of the Global Financial Crisis (for example, the Bank of England), the ECB is mandated according to Article 127(5) TFEU to ‘contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.’ 27 It should be noted, however, that with the activation of the ‘Sleeping beauty provision’ – namely Article 127(6) TFEU – and with the involvement of the ECB in the preservation of the euro during the Eurozone sovereign debt crisis, to continue to refer to financial stability as a contributory task, though consistent with the Treaty, is ‘to ignore the elephant in the room’.
Climate-related risks and monetary policy
Climate-related risks have become paramount for the conduct of monetary policy. 28 The International Monetary Fund (IMF) considers that climate change is macro-critical and that such ‘macro-criticality’ (which encompasses both macroeconomic and financial stability perspectives) affects the functions of the IMF in terms of surveillance, conditional financial assistance and other advisory powers. 29 The IMF also recognizes that a more systematic approach towards adaptation, mitigation and transition is needed when it comes to its work on climate change. 30 Given the importance of the IMF in monetary affairs and international monetary stability, this recognition is of fundamental importance also for the ECB.
Climate-related risks influence the price level and the monetary transmission channels 31 and are likely to do more so in the future. 32 They affect the banking and financial sector, the risk profile of assets and hence also directly the balance sheet of the ECB. 33 Understanding climate-related risks for risk-management purposes and as part of the collateral regime is essential to fully capture the consequences of climate change in the conduct of monetary policy. 34 Greening monetary policy, by integrating climate-related risks in the conceptualization of monetary policy strategy, risk assessment and collateral framework, is an integral part of the ECB's mandate to safeguard price stability according to Article 127(1) 1 TFEU and support financial stability according to Article 127(5) TFEU. The ECB has to be ‘climate-conscious’. 35
Moreover, the monetary framework also allows and calls for ‘climate-friendly’ measures, i.e., measures that support sustainability objectives as long as such measures do not place market participants or financial instruments, which are less sustainable or even ‘brown’, at a disadvantage and as long as such measures are compatible with the primacy of price stability. 36 The ECB should support environmental-friendly financial instruments and incentivize market participants to be more conscious about the carbon footprint, by enhancing disclosure requirements with regard to their climate- and sustainability-related performance. Such measures fall within the ECB's mandate in accordance with Article 127(1) 1, 2 and (5) TFEU. The ECB should enhance its disclosure and collateral regime to adapt it to new developments when defining and implementing monetary policy (see also Article 3.1 of the ESCB Statute).
Article 127(1) 2 TFEU obliges the ECB to support the general economic policies in the Union 37 with a view to contributing to the achievement of environmental objectives laid down in Article 3 (3) TEU. Article 11 TFEU applies across sectors including monetary policy. The ECB has an obligation to act on its secondary mandate in light of the objectives set forth in Article 3 TEU and 11 TFEU. 38 In addition, the ECB can invoke its contributory task to financial stability according to Article 127(5) TFEU to support the green transition and to set incentives to reduce financial risks wrought by climate change. 39 Therefore, the ECB has to take environmental considerations into account when conducting and implementing its monetary policy and has to support sustainability objectives within its monetary policy operations, as long as this does not run contrary to price stability or directly discriminates against certain groups of market participants. 40
A much-debated topic is whether the ECB may – within its corporate bond purchases or its collateral framework – take measures that directly discriminate against ‘brown’ counterparties, bonds or assets by treating ‘green’ bond issuers and corporations better. 41 The current tilting measures of the CSPP holdings and the plans to amend the collateral framework entail such measures. With regard to greening the CSPP holdings, some scholars and central bankers support departing from the principle of market neutrality in relation to corporate bond purchases, and instead favour purchases according to the principle of market efficiency, i.e., buying more ‘green’ bonds (bonds from climate-friendly, non-polluting industries). 42 However, it is debatable whether the monetary framework allows for measures that actively treat some market participants and financial instruments better than others not due to solely monetary policy reasons, but due to other policy objectives – such as sustainability goals. 43
Accountable independence of the ECB
An independent central bank, and especially the ECB, is a particular kind of independent institution, as it is independent in certain aspects, but at the same time constrained in other regards. 44 All central banks have legally defined objectives and in some cases, such as the ECB, a clear hierarchy among the objectives, with price stability as the primary one.
The ECB enjoys a very high degree of institutional, functional, operational and financial independence, in accordance with Articles 130, 282 TFEU, Article 7 ESCB Statute as well as other Treaty provisions, for example the prohibition of monetary financing in Article 123 TFEU. This degree of independence is unprecedented among central banks worldwide. But independence is only one side of the coin. Accountability is the necessary other side. Freedom requires responsibility and likewise independence must be accompanied by accountability. The latter is of the essence for the legitimization of an independent institution in a democratic society.
Accountability can be defined as an obligation owed by one person being the accountable to another, being the accountee, according to which the former must give account of, explain and justify their actions or decisions against criteria of some kind, and take responsibility for these actions. 45 The concept rests on four elements: (1) the accountable, (2) the accountee, (3) the content of the obligation and (4) the criteria of assessment. 46 The accountable is often the reference point to categorize the form of accountability, such as individual accountability, ministerial accountability, corporate accountability and/or, in our case, central bank accountability. The ‘accountee’ is the authority to whom accountability is owed. They are the guardians of those bodies and institutions that often enjoy a certain amount of discretion or independence. By virtue of the obligation to give account, the accountee assumes a position of authority vis-à-vis the accountable. 47 In the context of central banking, different accountees and, in consequence, different forms of accountability are of importance: accountability to Parliament (i.e., parliamentary accountability), accountability to the judiciary (i.e., judicial accountability), accountability to the audit function (i.e., audit control) and accountability to the general public. The content of the obligation to give account varies in degree. While ‘explanatory accountability’ only entails an obligation to answer questions, to give account of action, ‘amendatory accountability’ requires the accountable to amend or redress their actions and decisions if needed. In the realm of monetary policy, central bank accountability is typically explanatory 48 and so is the case for the ECB. The actions and decisions of the accountable are assessed against a set of criteria, which set standards for the exercise of power or require the accountable to achieve certain goals (hence the term ‘performance accountability’). The more complex the activity in question or the more dependent the achievement of goals on a variety of other factors, the more difficult it is to establish clear standards of conduct or assess whether the achievement and outcome is adequate.
Assessment can also take place ex ante and ex post. In the former case, accountability is exercised in the course of taking the decision or action; in the latter, the assessment takes place after the decision or action has been taken. An example of ex ante accountability is the appointment procedures of central bank officials, when such procedures require parliamentary approval (as in the US). The parliamentary debate of inflation targets (if such a parliamentary debate takes place) can also be qualified as a form of ex ante accountability. Reporting requirements and the appearances of the chair or governor of the central bank in front of parliamentary committees (such as the President of the ECB before the ECON Committee of the European Parliament) are forms of ex post accountability. 49
For economists, the performance parameter is important when they discuss accountability. Measuring the output of the accountee puts emphasis on efficiency and effectiveness. 50 Lawyers typically have less an eye on output, but rather focus on the political and institutional dimension of accountability which places the institution – in our case the independent central bank – within a framework of checks and balances and analyses accountability in relation to the three branches of the State – the legislative, the executive and the judiciary. 51 Accordingly, when applied to the central bank, different forms of accountability exist. First and foremost, parliamentary accountability, which serves as the key source of accountability in a representative democracy. It can be ensured by different procedures and mechanisms, including annual reports and appearances in front of parliament or public officials on a regular basis, and also in the case of an emergency situation. 52 Second, judicial review of the central bank's acts and decisions is often limited to take account of the central bank's independence and discretion. Yet this does not set it free to choose whether to adhere to the existing legal framework, its mandate and the competence structure. The ECB, as an EU institution, is integrated in the EU legal framework and subject to judicial control by the Court of Justice of the European Union (CJEU). The independent ECB is subject to legal and judicial control regarding the objectives and tasks and other provisions of the EMU and the Treaties in general as acknowledged in the OLAF case. 53 In contrast, in the USA, monetary policy measures are not justiciable (though supervisory and other decisions are). 54 Audit control complements parliamentary accountability and judicial review, and contributes to financial accountability. 55
Last, but not least, ancillary to these three forms of accountability is a certain degree of cooperation with the executive. Normally, an executive institutional set-up is characterized by ministerial hierarchy and oversight, i.e., all executive agencies and officers are overseen and instructed by other executive bodies and this chain of control and command ultimately ends with the respective ministers who are appointed and controlled by the parliament, thereby ensuring democratic accountability. It is typically the elected parliament who decides on the executive who is in charge of the state administration. Independent institutions are exempt from these oversight mechanisms. Having an adequate form of cooperation with the executive is a most sensitive and contentious topic within the design of accountability frameworks. Different jurisdictions have found different solutions and balances to this tension between independence and accountability according to the specific economic and political environment, legal traditions, institutional set-up and constitutional framework. 56 In case of the ECB, no EU institution and no Member State institution is allowed to supervise or instruct the ECB within its monetary policy. On the contrary, taking or receiving instructions on the side of the ECB and the national central banks is strictly prohibited by the EU law (see Article 130 TFEU).
Last but not least, although not institutionalized, the public is also an accountee and the support of the public opinion can be seen as a form of de facto accountability. It finds resonance in the press and media and the general political public debate (the ‘court of public opinion’). 57
While independence and accountability present two sides of the same coin, they are also part of a continuum on its two opposite ends. If an institution enjoys too much independence without sufficient and effective accountability mechanisms in place, there is the risk of creating a ‘state within the state’, while overloading an institution with too many strings of accountability and indirect ex post or ex ante controls might impede the effectiveness of its policy and hence the very own reason for its independence. 58
The quest for legitimacy in greening the ECB
The concept of accountability is not a means to its own end, but serves the quest for ensuring the legitimacy of independent institutions and actors. Legitimacy starts with the inception of an independent institution: independent central banks are generally created within a democratic process as a result of legislation bringing alive the institution itself and granting it independence. In the case of the ECB, this democratic process was ultimately rooted within the parliamentary processes within all Member States and resulted in the adoption of the EU Treaties which established the ECB as an independent institution.
While this first source of legitimization addresses the establishment of the independent institution, it is not sufficient to ensure that the exercise of power of this institution is also legitimate. This task of ensuring democratic legitimacy throughout the life of an independent institution on a continuous basis lies at the heart of accountability mechanisms – by giving account, explaining, justifying or taking measures of amendment or redress.
Ensuring an ongoing democratic legitimization by means of accountability may not be confused with politicizing the institution. Accountability mechanisms may never be construed in a way to allow the executive to de facto instruct the institution with regard to those aspects and tasks for which the institution enjoys independence and/or discretion. Accountability mechanisms are no substitution for executive command and control, but ensure that the institutions acts within its mandate and the existing legal framework according to the given objectives and tasks, while safeguarding its independence.
Legitimacy has two dimensions: a normative one which focuses on the legality of the political system and its actors; and an empirical one, which refers to the acceptance by society, i.e., a form of societal legitimacy. 59 Both are fundamental to ensure that central banks, as non-majoritarian institutions exempt from forms of direct democratic legitimacy, 60 are still sufficiently legitimate.
While central banks are technocratic institutions, they still fulfil tasks that are essential for the functioning of society and the flourishing of the economy. Monetary policy heavily influences the economic environment and conditions of the lives of every citizen and – as the unconventional monetary policy measures during the Global Financial Crisis (GFC) and the COVID-19 pandemic have shown – bear substantial (re-)distributional effects. As Lastra and Miller have pointed out: ‘Central banks do not only administer a technical regulatory scheme affecting discrete industries or interests. In their core monetary policy role they regulate price levels, which is one of the most fundamental powers of government, and one of the most important practical concerns of the public at large.’ 61 This makes the quest for legitimacy ever more important. 62
Lastra and Skinner summarize the argument as follows:
63
The [independent] central bank (…) receives a delegated mandate by law (via a statute, a constitution, or a treaty). But such delegation is always subject to constraints, including the provision of adequate mechanisms of accountability (legislative and others). Central bank independence gives officials a degree of discretion in the pursuit of their delegated mandate, but only subject to a framework of formal rules. However, since central banks are by definition technocracies – unelected experts – a basic problem of legitimacy arises: how to reconcile their powers with the demands of a democracy? The answer is through accountability. The design of accountable independence is always a balancing act. In all democratic societies there is a tension between ensuring accountability for governmental actions while simultaneously ensuring that an institution enjoys freedom from political interference sufficient to make decisions without fear or suspicion of political or social capture (or reprisal).
Accountability framework of the ECB
Drawing on the different forms of accountability briefly outlined above, the EU Treaties foresee some mechanisms for parliamentary accountability, judicial review, audit control and, last but not least, accountability to the public.
The strongest form of accountability is to the European Parliament according to Article 284(3) TFEU and Article 15 of the ESCB Statute. With regard to the conduct of its monetary policy, the European Parliament holds the ECB accountable through the so-called ‘Monetary Dialogue’, as well as annual reports and parliamentary written questions to the ECB. 64 In addition, the European Parliament enjoys a consultative role in the appointment procedures for the members of the ECB's Executive Board. The exchange of letters between the ECB and the EP on structuring their interaction practices in the area of central banking 65 identifies the elements of such interaction (the ECB's Annual Report, hearings before the ECON Committee, questions for written answer, ad hoc interactions with the members of the Executive Board, informal visits to the ECB and ECB opinions). While there are no other interinstitutional arrangements between the ECB and the European Parliament in the monetary policy realm, there exists an accountability regime for the ECB's supervisory function as laid out in the SSM Regulation. An interinstitutional agreement between the European Parliament and the ECB and a Memorandum of Understanding between the Council of the EU and the ECB specifies the SSM provisions. 66
Judicial review is the second string of accountability of the ECB. Its decisions and the actions fall within the jurisdiction of the Court of Justice of the Euopean Union (CJEU) and can be challenged according to Article 263 TFEU and Article 35 of the Statute of the ESCB. In its May 2020 decision, the German Federal Constitutional Court asked the ECB to substantiate its reasoning with regard to its proportionality assessment. Irrespective of the question of the right jurisdictional domain and the appropriate locus of accountability, 67 the general quest for a more and profound explanation and justification of its actions and also the side effects of its measures is to be welcomed. The CJEU in its Weiss ruling stipulated that the principle of proportionality is setting the legal limits on the use of monetary policy action and that proportionality requires that the instruments chosen are ‘necessary’ to achieve the price stability objective. The ECB may thus be called to justify in front of the Court that the measures adopted to fight the pandemic are necessary to ensure the effective functioning of its monetary policy and to meet the price stability objective. 68
There exist some ancillary mechanisms of accountability vis-à-vis the Council and the Commission, as provided for by Article 284(3) TFEU and Article 15 ESCB Statute. 69 However, as there is no fiscal competence at Union level and the ECB has no European fiscal counterpart in a form of a Euro Treasury or Euro Minister of Finance, the interaction between monetary and fiscal policy is asymmetric. 70
Last but not least, the ECB is itself very aware of its accountability towards the public. The public debate about the appropriate monetary policy is intense and outspoken and the ECB engages in this debate and tries to inform the public, explain its policy, communicate its policy in the future and anchor monetary policy expectations. The reactions by the public to the ECB communication are essential both to understand the inflation expectation and to assess the public trust in its actions. It is essential to build credibility as a source of societal legitimacy. 71
Accountability of greening the ECB
With expanded central bank responsibilities and influence we need commensurate measures of accountability. This is particularly relevant in the debate about the design of the accountability mechanisms for greening the monetary policy of the ECB. In this context, we first assess greening as a legitimate policy objective, then discuss its implementation and conclude with a plea for an evolution of accountability mechanisms.
Greening as a legitimate policy choice
As mentioned above, there is a heated debate on whether central banks in general and the ECB in particular may, within their respective mandates, also have sustainability and the fight against climate change as monetary policy objectives. 72 The debate addresses, inter alia, the relationship and potential tension with other objectives (notably the primary objective of price stability in the case of the ECB and the primary objectives of price stability and financial stability in the case of the Bank of England). The ECB needs to give account (explain and justify) for the choice of climate change as an objective, which it does at least by referring 73 to the Paris Agreement, 74 thereby making reference to the overall EU's ambition to reduce CO2 emissions 75 (by way of comparison, in the case of the Bank of England, climate change is mentioned in the remit letters for the Monetary Policy Committee 76 and for the Financial Policy Committee 77 ; there is also a new regulatory principle in support of the transition to net zero 78 ).
Greening is indirectly embedded in the secondary mandate of the ECB according to Article 127(1) 2 TFEU by reference to Article 3 TEU, where reference is made to environmental objectives of the EU in general. However, in light of the plethora of objectives enshrined in Article 3 TEU which Article 127(1) 2 TFEU refers to, the ECB has to provide more reasoning for selecting sustainability and climate change above other objectives, which are, after all, the result of political and societal choices.
When it comes to the primary mandate of price stability under Article 127(1) 1 TFEU and to the contributory task of financial stability under Article 127(5) TFEU, the ECB needs to give reason in front of the European Parliament within the existing modes of accountability (while also aiming to develop new modes of accountability as we explain below) of why climate change is concretely affecting its mandate. This reasoning requires detailed explanation and justification of the design, scope, time framework and other features of the green monetary policy measures adopted (or to be adopted) by the ECB. 79 This enhanced disclosure and reasoning is an essential component of accountability. Ultimately, if the Member States wish to give climate change even greater legitimacy, they must change the Treaty.
From a broader perspective, it would be helpful to understand how the objective of supporting the green transition is positioned in relation to other societal objectives which are also on the EU's agenda and being implemented by EU legislation – as gender equality, for example – and, most importantly, how this affects the legitimacy of the ECB to prefer this one goal (sustainability) over other goals. Also, as the war in the Ukraine is vividly demonstrating – how is the ECB planning to act if sustainability goals temporarily are not at the forefront of policy in the light of energy security? These are the types of question that the European Parliament must ask the ECB. Perhaps a new subcommittee is needed to deal with these matters. In any case, the ECB should make every possible effort within the existing parliamentary mechanisms to give account of how it will deal with trade-offs in the medium and long term if policy preferences change, and if and how it will adapt to such changes.
Tilting measures as a legitimate implementation of greening monetary policy
The ECB has decided to decarbonize its corporate bond holdings based on issuer-specific climate scores by way of tilting towards issuers with better scores. It thereby moves its monetary policy strategy away from the principle of market neutrality and instead adheres to the principle of market efficiency. This entails a higher degree of accountability for the following reasons:
The principle of market neutrality – while acknowledging that the concept is not as ‘neutral’ as it seems, but entails some inherent biases – is enshrined in the ECB's general legal framework and the general mode of conceptualization of monetary policy measures. Monetary measures adhering to the principle of market neutrality therefore do not require any specific justification for the market neutral design as such. In addition, when implementing monetary policy measures in line with the principle of market neutrality, the ECB is not pursuing any other objectives enshrined in Article 3 TEU besides price stability and/or, as secondary objectives, the support of the general economic policies in the Union and financial stability (Article 127(1) 2 and (5) TFEU).
The tilting measures are not based on the principle of market neutrality, but on the principle of market efficiency. They pursue the objective of sustainability and the fight against climate change as enshrined in Article 3 TEU and the ECB has to justify the choice of such objectives. In addition, the tilting measures are by definition discriminatory measures. The ECB has to explain how exactly and why certain market participants are treated less favourably compared to other market participants with better climate scores. The ECB needs to give account of why it may implement such discriminatory measures on the grounds of environmental protection and to what degree. In sum, whenever the ECB is shifting away from the principle of market neutrality, the standard of accountability should be heightened. Furthermore, the process of standardization in this field is still in its infancy and requires the development of a supporting normative framework (including soft law standards) as well as capacity-building initiatives, collaborative research with scientists and climate specialists, impact assessments and cost-benefit analyses.
The overall climate score to tilt bond holdings used by the ECB combines the following three sub-scores: 80 (i) the backward-looking emissions sub-score, based on issuers’ past emissions, looking at how companies perform compared with their peers in a specific sector as well as compared with all eligible bond issuers, with those performing better receiving a better score; (ii) the forward-looking target sub-score, based on the objectives set by issuers to reduce their greenhouse gas emissions in the future, with companies with more ambitious decarbonization targets receiving a better score, thus incentivizing companies to reduce their emissions; and (iii) the climate disclosure sub-score based on the assessment of issuers’ reporting of greenhouse gas emissions. Those issuers with high-quality disclosures receive a better score. This incentivizes bond issuers to improve their climate-related disclosures.
This clear standard is helpful to understand the ECB's benchmark and to hold it accountable – especially since the selective monetary policy measures embodied in these tilting measures ‘pick winners and losers’. The ECB points out that the design of the climate scoring methodology is guided by the requirements for the EU Climate Transition Benchmarks and the EU Paris-aligned Benchmarks. 81
Evolution of accountability mechanisms
It is a bit of a paradox that Germany has become one of the strongest advocates of central bank accountability considering that the institutional mechanisms of accountability played a limited role in the discussions that led to the establishment of EMU, a bit like an ‘afterthought’ in the framework of independence, and that this understanding is rooted in the culture of consensus and the support of the general public that characterized the Bundesbank and that influenced the design of the ECB. 82
In order to enhance accountability, going forward we need to combine traditional forms of accountability with new forms of accountability. As to the former, the Monetary Dialogue must be enhanced and strengthened as the primary locus of parliamentary accountability and the place for in-depth discussions and challenges of monetary policy. 83 The inquiries that the House of Lords Economic Affairs Committee 84 has conducted into the QE program of the Bank of England, CBDCs and the operational independence of the Bank of England offer a commendable exercise of parliamentary scrutiny of monetary policy, which can be replicated in the context of greening the ECB. These inquiries focus around a single issue (QE, CBDCs and operational independence) and last for several months, thus allowing ample time to gather oral and written evidence and to have in-depth discussions with experts of the highest calibre, including current and former central bank governors and Treasury officials. The final ‘evidence-based reports’ are clearly written to reach the average citizen, explaining highly complex and technical matters in simple language. This modus operandi could be replicated by the Members of the European Parliament participating in the Monetary Dialogue with the ECB. Given the difficult decisions involved in the ‘choice’ of secondary objectives by the ECB and the need for adequate information and communication, the European Parliament must ‘match expertise with expertise’ and dedicate adequate resources and personnel to hold the ECB to account in the discharge of its climate-related responsibilities, to safeguard the legitimacy of the monetary framework and to ensure that the primacy of the primary objective of price stability is respected in line with the Treaty obligations and that there is an appropriate calibration of the risks involved. Perhaps a new dedicated subcommittee should be established in this regard.
As to the new forms of accountability, consultations, impact studies and proportionality assessments can also help reconnect normative and societal legitimacy, while improving central bank communication. External reviews of central bank actions, for example the proposed review of the forecasting models of the Bank of England to be led by former Fed Chairman Ben Bernanke, are welcome forms of accountability. 85 The setting up of the Independent Evaluation Office (IEO) in the Bank of England in 2014 (modelled upon the IEO of the IMF) is another welcome new form of accountability. 86
The overall accountability of the ECB as the central bank of the euro area has already faced challenges in light of the monetary policy interventions during the GFC and measures to address the fallout of the COVID-19 pandemic. With these unconventional measures, which partly have shown quasi-fiscal implications and have demonstrated vast re-distributional effects, the ECB has de facto outstretched – if not overstretched – its mandate and competences and augmented its powers. Against the background of this increase in complexity and expansion of central bank monetary policy measures, parliamentary accountability and judicial control gain importance and become more complex at the same time.
Considering the expanded range of instruments and the vast economic and societal effects of the monetary policy measures implemented by the ECB in the last decade, the accountability of the ECB needs to be strengthened to respond to this de facto increase in power. 87
