ECB announces climate tilt to €30bn annual corporate bond reinvestments

The European Central Bank has announced a climate tilt to any reinvestments from its corporate bond purchase scheme, adjusting the estimated €30 billion yearly reinvestment in line with a number of climate factors.

While no firm will be excluded from the programme on climate grounds, the ECB will increase the share of assets on its balance sheet from companies who perform better on three metrics against those with a poorer climate performance. Firms will be assessed based on their carbon reduction targets, emissions disclosures and actual emission levels.

More specific details of how climate performance will be measured will be made public closer to the time, but the ECB said it would look at historical emissions across all three scopes, based on publicly available data.

The measures will apply from October this year, with the ECB set to publish climate-related information on its holdings from the first quarter of 2023. However, it will not publish details of the actual climate tilt, in line with its policy not to disclose holding size in the wider purchase scheme.

Isabel Schnabel, member of the ECB’s executive board, told reporters that the tilt aimed to incentivise high-emitting companies to transition. “We want to give all those companies an incentive to become greener and therefore make sure that over time they remain part of these portfolios.”

She said the current portfolio was biased towards high emitters as they were more capital-intensive and thus more likely to issue bonds. While noting that the bank was trying to move away from this bias, she emphasised that “the climate change agenda must not interfere with the monetary policy stance”.

The ECB currently holds around €350 billion of corporate bonds issued by European companies, of which roughly €30 billion is expected to be reinvested each year.

The bank is also planning a number of other climate-related changes to its monetary operations. It said that the Eurosystem – comprising the ECB and the central banks of eurozone members – will urge rating agencies to be more transparent on how they incorporate climate risks into their ratings and to be more ambitious in their disclosure requirements on climate risks, calling the current standards “not yet satisfactory”. The Eurosystem has also reportedly agreed on a set of common minimum standards for the inclusion of climate risk in central banks’ in-house credit assessments, to be applied by the end of 2024.

In addition, the ECB has updated its collateral framework, limiting the share of assets issued by entities with a high carbon footprint that can be pledged as collateral. The integration of climate change risks into the assessment of haircuts – reductions applied to the value of collateral based on its riskiness – is also under consideration.

Katharine Neiss, chief European economist at PGIM Fixed Income, said the ECB was right to play “a complementary rather than leading role on climate change” given its price stability mandate. “By aligning itself with government objectives, leading by example and incentivising companies’ investment plans to be consistent with agreed climate targets, the positive impact will be cumulative over time.

“The direction of travel from central banks, including the ECB as well as the Bank of England, towards bringing climate considerations into their corporate bond schemes has provided an important signal that they are catching up with trends in public markets that are already reflected in pricing.”

At the same time, she warned, the announced changes “should not be viewed as a substitute” for the substantial amount of public and private investment that is needed to address climate change. “[They] are simply too small given the scale of the challenge,” she said.

Jo Richardson, head of portfolio strategy at think tank the Anthropocene Fixed Income Institute, noted that the ECB is the largest buyer in the European market, owning on average 30 percent of every bond that it invests in. “If a bond matures, and nearly 30 percent of its investors are not going to reinvest, that is a clear negative in terms of refinancing opportunities for these high-intensity emitters,” she added. “This will produce a meaningful relative widening of those spreads.

“Investors should also consider if this represents only a first step, given Christine Lagarde’s reiteration of their commitment to fight climate change.”

Archie Beeching, director of responsible investing at debt investor Muzinich, welcomed the announcement, but said the ECB’s “carrot for climate leaders needs to be matched with more stick to incentivise climate laggards to transition their businesses quicker”.

“We hope these kinds of mechanisms will become more of a permanent feature,” he said.

The ECB is set to publish the results of its climate stress test on 8 July.