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Regulatory Briefing: ECB commits to greener corporate bond purchases

By Victor Smart

The European Central Bank has committed to aligning its monetary policy operations with its climate action plan, accounting for climate change in corporate bond purchases, collateral frameworks, disclosure requirements and risk management.

The measures apply mainly to corporate bonds, not sovereign debt. This means they apply to only a minority of assets purchased by the ECB, and some campaigners expressed disappointment that the move does not go further. But the tilt is “pretty ground-breaking”, wrote Victor van Hoorn, executive director of Eurosif, the European sustainable finance forum, on LinkedIn.

The ECB aims to gradually decarbonise its €386bn corporate bond portfolio in line with the Paris Agreement. It will skew holdings towards issuers with “better climate performance” – measured in terms of carbon emissions – through the reinvestment of the sizeable redemptions expected over the coming years. 

The central bank said it expects the measures to apply from October and to start publishing climate-related information on corporate bond holdings regularly from the first quarter of 2023.

It will also 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 eurozone central banks. At first, this will apply only to marketable debt instruments issued by companies outside the financial sector. 

In addition, eurozone central banks will only accept as collateral marketable assets and credit claims from companies and debtors that comply with the EU’s new Corporate Sustainability Reporting Directive.

Finally, eurozone central banks will enhance their risk assessment tools and capabilities to better include climate-related risks. For example, ECB analysis has shown that rating agencies’ current disclosure standards are not satisfactory.

In favour. Daniela Gabor, professor of economics at the University of the West of England, told Sustainable Views: “The ECB is the only large central bank still seriously in the business of decarbonising private finance. Most remarkable, it is willing to penalise dirty lending, both through its outright corporate bond re/investments and in its collateral framework. The devil is, of course, in the detail of implementation – what haircuts, on which activities etc.”

Now that it is committed, the ECB has to proceed fast and in a transparent manner with substantive penalties, said Gabor.

She added that “dirty lenders” (from big European banks to international asset managers) have successfully lobbied for a weakening of climate rules in Europe for the past five years. “It is up to the ECB to prove that it can protect its climate mandate from private capture,” she said.

Against it. Though ECB president Christine Lagarde argues that the measures fall within the ECB’s mandate, critics insist the central bank should focus instead on inflation, currently running at record levels.

Most recently, former US Treasury secretary Larry Summers raised this point, in a London School of Economics lecture. “I always told my kids that how many extracurricular activities they could do depended upon how they were doing in their core central courses,” said Summers, as reported by the Financial Times. “Maybe you don’t get to take on global climate change when you’re having double-digit inflation rates.”

Short vs long-term impact. Meanwhile, in a briefing note ING argued that, with many of the details still lacking, the ECB’s move will not promote ESG investments’ outperformance over other assets in the short term. 

“However, this is another small piece in the jigsaw contributing to ESG outperformance in the long run,” said the note. “We will likely see little benefit in 2022, as there will really only be two tradeable months (October and November), as well as the lower reinvestment levels. But long term, this will contribute to the ESG market. It will be another reason for issuers to set and achieve strong ESG goals, thus growing the ESG market. We expect to see the greenium [the green premium] increase, as demand for ESG debt will rise.”

A service from the Financial Times