The European Union has been urged to create a public ESG ratings agency in a new report analysing the quantitative easing (QE) programme of the European Central Bank (ECB), which finds it is heavily exposed to the most carbon-intensive companies.
It is the latest study to analyse QE programmes and find carbon-intensive sectors and companies make up a substantial part. The Bank of England’s QE programme has faced similar scrutiny.
The ECB’s Corporate Sector Purchase Programme (CSPP) was one part of QE, and addressed the lack of bank lending in the real economy by purchasing Eurozone corporate bonds.
A new study of CSPP from NGO Positive Money Europe and think tank Veblen Institute finds more than €110bn (or nearly 63% of the programme) has been invested in the four sectors that contribute the most to global warming: fossil fuel extraction and distribution; the automotive sector; the most energy intensive industries; and electricity generation.
The authors say the findings reveals the mismatch between the EU’s climate objectives and the ECB CSPP programme.
While the carbon intensity of the ECB’s QE programme has been under scrutiny for some time, the new study ‘Aligning Monetary Policy with the EU’s Climate Targets’ is the first to provide a comparison of estimated exposure for the six national central banks operating CSPP in the Eurozone.
CSPP launched in 2016 and ended in 2018 with the entire QE programme. The asset purchases made during that time were delegated to six central banks which are members of the Eurosystem: Banque de France (France), Banco de España (Spain), Banca d’Italia (Italy), Deutsche Bundesbank (Germany), Banque nationale de Belgique (Belgium) and Bank of Finland (Finland).
The study finds the portfolios of the Spanish and Italian central banks are significantly more exposed to fossil fuels and the Bundesbank is investing heavily in the automotive sector.
The Banque de France has lower carbon exposure because of the weighting of nuclear energy in the French electricity production system (Banque de France is the only central bank within the CSPP buying only from its home market).
The National Bank of Belgium and Bank of Finland are less exposed.Though it represents a tiny fraction of the €2600bn QE programme, the CSPP programme’s estimated carbon exposure has been severely criticised by NGOs, academics and MEPs who have pressed ECB President Mario Draghi on the issue. Last year, they asked Draghi to assess the climate impact of QE.
In the new study, the authors make the same request to the ECB, saying it should prepare for the full integration of carbon footprints into its investment strategy.
It also calls on the ECB to stop relying on rating agencies that do not integrate GHG analysis in a transparent manner and calls on the EU to set up a public ratings agency specialised in environmental and ESG criteria assessments.
On the existing CSPP portfolios, the study says the Eurosystem should phase out its holdings of bonds linked with the production and distribution of fossil fuels entirely, with the exception of assets labelled as green bonds.
Late last year, the ECB revealed it was a major corporate green bond buyer owning 20% of all non-bank corporate green bonds out of Europe. But the report analysis says green bond holdings as part of the CSPP programme remain insignificant and are heavily concentrated in the utilities sector.
And purchases under CSPP, including green bonds, are not deliberate but neutral, focusing on the most liquid and creditworthy fixed income assets.
The report argues the principle of market neutrality, one of the main tenets of many central banks’ monetary policy, is problematic, insofar as it doesn’t prevent asset purchase programmes from distorting markets.
Wojtek Kalinowski, co-director at Veblen, said: “The ECB should pro-actively steer the financial markets towards sustainability, rather than passively reproducing the current unsustainable market trends. This issue will not go away. If it sticks to a narrowly defined market neutrality, the ECB will continue to finance the most carbon-intensive sectors for decades to come.”
Central banks are becoming increasingly focused on green finance and sustainability. The new Network for Greening the Financial System (NGFS) is a coalition of central banks and supervisors focused on strengthening the Paris agreement and helping the financial system become more sustainable.
Its main focus is central banks’ role in supervising financial market, but central banks’ own activities are also under its remit.
The six European central banks under the CSPP programme are part of the NGFS, which releases its first report later this month at the Banque de France.