Dhe European Central Bank is serious about its plans to take aspects of climate protection more into account in monetary policy. As the central bank announced on Monday, the Governing Council of the ECB has decided to reinvest expiring bonds from the corporate bond purchase program in accordance with climate protection criteria as early as October. Various criteria are to be taken into account for this, including greenhouse gas emissions, company plans to improve the situation and transparency with regard to the company’s impact on the climate.
“With these decisions, we are delivering on our commitment to fight climate change,” said ECB President Christine Lagarde. “As part of our mandate, we are taking further concrete steps to mainstream climate change into our monetary policy operations. And as part of our evolving climate agenda, we will take further steps to align our activities with the goals of the Paris Agreement.”
Prevent greenwashing
At a press conference, ECB Executive Board members Isabel Schnabel and Frank Elderson explained that around 30 billion euros are expected to flow back from the existing corporate bond purchase program every year. One wants to use part of these returns to shift the bond holdings according to green criteria. Schnabel spoke of a “milestone”.
When asked whether such an objective would not lead to conflicting objectives in view of the high level of inflation, Schnabel and Elderson explained that price stability was the ECB’s primary objective, but that it could also support the EU’s economic policy as a serious secondary objective. Therefore, the level of bond holdings should be based exclusively on monetary policy criteria. There shouldn’t be any doubt about that.
So far, however, the central bank has felt obliged to be market neutral when it comes to purchasing bonds, and has bought bonds based on their availability on the market. This has led to a preference (“bias”) for large companies with high emissions, said Schnabel. This must now be corrected with a new “benchmark”, an internal scoring system. Both also stated that all available data would be used to avoid “greenwashing”, i.e. preventing companies from presenting themselves as greener than they are. But that will still be “a journey,” said Elderson.
Green investments also have priority for deposited securities
It was also decided that certain rules regarding climate protection should also apply in future to the collateral accepted by the ECB in lending transactions. However, this will only start at the end of 2024. The Eurosystem will limit the share of assets issued by companies with a high carbon footprint that could be pledged as collateral by individual counterparties when borrowing from the Eurosystem.
“The new cap regulation aims to reduce climate-related financial risks in the Eurosystem’s lending business,” the ECB announced. Initially, the Eurosystem will only apply these limits to marketable debt instruments issued by entities outside the financial sector. To the extent that the quality of climate-related data improves, other asset classes could also fall under the new limit value regulation.
In order to encourage banks and other counterparties to prepare early, the Eurosystem will test this system before it is actually launched. Further details, including the schedule, would be announced in due course. In addition, starting this year, the Eurosystem will take climate change risks into account when reviewing haircuts for corporate bonds used as collateral. These steps are part of the ECB’s existing roadmap for “greening” the central bank, but have only now been decided in concrete terms.
