European Central Bank switches pension to low-carbon equity benchmarks

Eurozone supervisor also looking at sustainability of wider ‘non-monetary policy portfolios’

The European Central Bank (ECB) has switched to low-carbon equity benchmarks for its €1.3bn staff pension fund, reducing the greenhouse gas emissions attributed to the passive portfolios by around 50%, it estimates.

In May, the Eurozone’s central bank announced in its annual report that it had decided to replace its pension fund’s equity benchmarks with “low-carbon versions”. 

An ECB spokesperson confirmed to RI that it made the switch last month “following close collaboration between our staff, the benchmark provider and our two external asset managers”. 

“The resulting amendment in the compositions of the sub-portfolios has led to a significant reduction of the GHG (greenhouse gas) emissions attributed to these portfolios of around 50%”, she said. 

The ECB would not disclose the benchmark provider or the size of the portfolios but said that its external investment managers were UBS and State Street Global Advisors.

Climate change was described as “mission-critical” for the central bank last year by its incoming President, Christine Lagarde. 

Benchmarks are also a key pillar of the EU’s sustainable finance Action Plan. 

Two regulatory benchmark categories are currently being developed by the EU: Paris-Aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs) – see RI’s coverage of the recent consultation.

Earlier this month, German economist and member of the ECB’s Executive Board, Isabel Schabel said in a speech that the central bank is also “exploring options” on how it can incorporate sustainability into its “non-monetary policy portfolios”. 

The ECB provided more detail in its annual report, revealing plans for the “practical implementation of SRI [sustainable and responsible investment] principles in its own funds portfolio, which consists of its paid-up capital and its general reserve fund”.

This work is informed by the ECB’s participation in the Network for Greening the Financial System – the central banking network recently published guidance for members on integrating sustainability into portfolio management.

Schnabel also discussed the role of central banks in driving green finance in her address to the virtual roundtable organised by the INSPIRE research network.

Covid-19, she said, provides a “chance to build a greener economy” and “break the vicious circle of weakening entrepreneurship and the slow diffusion of new and green technologies that have held back productivity growth and prosperity in Europe for too long”. 

Schnabel added that the ECB “will be no bystander on this journey”. 

“As climate change poses severe risks to price stability, central banks are required, within their traditional mandates, to strengthen their efforts to support a faster transition towards a more sustainable economy,” she said. 

The move is one of a number of indicators that the EU is feeling the pressure to incorporate sustainability into its own financial affairs. The EU Action Plan on Sustainable Finance and its upcoming sequel, the Renewed Strategy, are aimed at private finance and overseen by the European Commission’s department for financial stability and capital markets, DG FISMA, which only has the power to make rules for banking and finance. As the agenda hots up, there have questions raised around whether the EU will apply such rules to their own funds. 

In May, the EU said that elements of its Covid recovery plan and updated budget would be guided by principles laid out in the EU green taxonomy. 

More recently, the European Stability Mechanism – known as the EU ‘bailout fund’ – put out a tender for an “environmental, social and governance framework”. The ESM, which was set up in 2012 to provide loans to troubled member states, raises much of its money through the bond markets. It has so far has no social or environmental conditions placed on borrowers. The ESM recently created a line of credit as “Pandemic Crisis Support”, for sovereigns to spend on employment and health spending to tackle Covid-19, saying it would  “fund the potential additional liquidity needs through the issuance of social bonds”.

Additional reporting by Sophie Robinson-Tillett