Euro-zone bailout fund pledges ESG investment of own €80bn capital

European Stability Mechanism signs up to PRI

The European Stability Mechanism (ESM), the intergovernmental institution for euro-zone countries, has joined the United Nations-backed Principles for Responsible Investment (PRI) to integrate ESG factors within the investment of its own capital.

The pledge covers ESM’s “paid-in capital”, up to €80.5bn, provided by the 19 Eurozone members which are effectively its shareholders. Germany, Italy and France are the largest with 27%, 20% and 18% of shares respectively.

According to an ESM spokesperson, such portfolio includes exposure to about €300m invested in green bonds. The paid-in capital is not invested in its entirety as a variable amount is held on cash deposits.

Klaus Regling, Managing Director of the ESM, and formerly an economist with the IMF and the German Finance Ministry, said the ESM considers joining the PRI “an important step forward in our institution‐wide ESG efforts.”

Becoming a PRI signatory will not alter the investment guidelines of the ESM, meaning the organisation will keep investing only in fixed-income with first-class credit ratings.

The paid-in capital is looked after and managed prudently, the spokesperson said, to improve the ESM’s credit ratings and ability to operate in financial markets.

The ESM’s role has been to provide market access to troubled Eurozone countries. The Luxembourg-based institution raises capital from financial markets by issuing bonds, which it later lends to countries in the form of loans.  

So far the ESM, together with its predecessor the European Financial Stability Facility (EFSF), has disbursed more than €255bn to five countries.

On the back of the sovereign debt crisis, from 2010 to 2012, the EFSF provided “cash-for-reform” programmes to Ireland, Portugal and Greece.

After the ESM was set up in 2012, Spain received funds to recapitalise its banking system that same year and Cyprus received the first “fully fledged ESM programme”. In 2015, Greece signed a third bailout programme of up to €86bn.

Among PRI signatories, there are Institutional Financial Institutions, or IFIs, that can be considered peers of the ESM such as the European Bank for Reconstruction and Development (EBRD) or the World Bank Group.