By Marc Jones
LONDON (Reuters) - One of the European Central Bank's top policymakers poured cold water on calls for a climate change-focused quantitative easing program on Tuesday, saying such a move would heavily distort the green bond market.
France's central bank governor Francois Villeroy de Galhau said there had been suggestions for "green quantitative easing" -- introducing a bias toward green assets in the ECB's purchase program framework.
"Despite its apparent simplicity, this proposal is incomplete and has serious limitations," Villeroy said in a speech at the World Conference of Banking Institutes.
He stressed that monetary policy targets a macroeconomic objective in the form of inflation and does not single out specific social or sectoral objectives.
"Massive purchases on a relatively shallow pool of green bonds could seriously distort the market," he added. "I prefer a more 'integrated' and holistic approach."
Villeroy, one of the founding members of the central bank Network for Greening the Financial System (NGFS) said climate change is a source of financial risk, adding: "It can also provoke both upward price pressures and a slowdown in activity – and can thus generate a long-term stagflationary shock."
Stagflation is where persistently high inflation combined with high unemployment can cause an economy to stagnate.
Villeroy said central banks should contribute to global efforts to understand and anticipate the economic effects of climate change and integrate the information into their macroeconomic models.
They could also change the mix of assets they accept as collateral for their cheap funding, potentially giving preferential treatment to green bonds or penalizing bonds or loans used to fund things detrimental for the planet's health.
"This requires the development of a robust methodology to accurately assess the impact of climate change on the credit risk of eligible assets," Villeroy said.
(Reporting by Marc Jones; Editing by Huw Jones and Catherine Evans)