ECB deepens green tilt in corporate bond purchase programme

The European Central Bank has further deepened the green shading of its corporate bond investments, announcing an end to primary market purchases of all but the greenest issuers.

The ECB, Europe’s largest purchaser of corporate bonds, is winding down its corporate holdings under the asset purchase programme as part of its quantitative tightening measures.

In July, the bank announced plans to introduce a climate tilt to the roughly €30 billion annual reinvestment from its corporate sector purchase programme (CSPP), based on issuers’ backward-looking emissions, forward-looking targets and climate disclosures, with the possibility of halting purchases from the worst performers.

At its December meeting, however, the ECB said it would continue full reinvestment of maturing securities under its asset purchase programme, which includes the CSPP and equivalent programmes for public sector bonds, covered bonds and asset backed securities, until February 2023. After this date, reinvestment will be cut by an average of €15 billion a month until the end of Q2.

On Thursday, the bank noted that redemptions under the programme between March and June will exceed this €15 billion figure, so the excess will be reinvested. It said that for private sector purchases this reinvestment will be switched to secondary market purchases “in order to better steer the amount of the purchases conducted under each programme”.

The only primary market purchases which will continue are those of corporate green bonds and issuers with a “better” climate performance. The benchmark which guides overall purchases will also have its green tilt strengthened, with the weighting given to better climate performers increased.

Ulf Erlandsson, CEO of the Anthropocene Fixed Income Institute, said it is “pretty clear” that companies such as Glencore, Shell, Schlumberger and Ryanair will in future face lower investor demand for new eurobonds.

“The ECB has looked like the biggest subscriber in some of their earlier deals and is not likely to be there anymore, according to our analysis,” he added.

While the moves will strengthen the climate credentials of the ECB’s bond investments, they do not go as far as had been previously suggested.

After the ECB’s announcement that it would be winding down reinvestments, executive board member Isabel Schnabel mooted an active sell-off of the worst climate performers, noting that the climate tilt had “lost part of its punch” when it decided to stop net asset purchases.

Such a sell-off could have a substantial impact in the secondary markets, Erlandsson noted.

“In terms of secondary markets, the effects could be substantial in individual bonds,” he said. “On average, the ECB owns 27 percent of the outstanding in the ISINs that they hold. If you hold such big positions, it is very hard to start selling without prices starting to fall.

“Also remember that the ECB selling a bond might be an indication it is thinking around collateral charges for that issuer too, affecting other investors’ appetite in a secondary fashion.“

When it first announced the tilt, the ECB also said that purchases of low-scoring issuers will be constrained “or even halted” until scores improve. However, a spokesperson for the bank confirmed to Responsible Investor that the increased tilt would not mean that poor performers will be excluded.