The European Central Bank can help markets price climate risk more accurately to help protect the environment and its own balance sheet, ECB board member Fabio Panetta said on Monday.

Joining the fight against climate change, possibly also via bond purchases, has been a key goal of ECB President Christine Lagarde since taking the helm just over a year ago.

Panetta was opening the door to taking climate-related risk into account when the ECB conducts monetary policy, although he was mainly referring to the ECB's lending operations to banks rather than its multi-trillion-euro bond-buying programme.

"The ECB has to protect its balance sheet from the financial risks caused by climate change that are not correctly priced by the markets," Panetta said.

"By performing its own analysis of these risks on the basis of rigorous methodologies, the ECB can contribute to the accurate valuation of these climate-related risks."

ECB policymakers are debating what role climate considerations should play in the institution's purchases of corporate bonds

So far the ECB has bought credit based on outstanding amounts but Lagarde has said in the past the bank might have to consider a more active approach to correct a market failure.

"Our strategy review enables us to consider more deeply how we can continue to protect our mandate in the face of (climate) risks and, at the same time, strengthen the resilience of monetary policy and our balance sheet," Lagarde said in a speech earlier on Monday.

She added the ECB was creating a team of around 10 ECB employees, reporting directly to her, to set the central bank's agenda on climate-related topics.

"Climate change can create short-term volatility in output and inflation through extreme weather events, and if left unaddressed can have long-lasting effects on growth and inflation," Lagarde said.

The ECB also said on Monday it would invest some of its own funds, which total 20.8 billion euros ($25.3 billion) and include capital paid in by euro zone countries, reserves and provisions, in a green bond fund run by the Bank for International Settlements.

Reuters