Revealed: European central banks emerge as major corporate green bond buyers

Eurosystem banks amass €6bn holding in the asset class

The European Central Bank has revealed that EU central banks own 20% of all non-bank corporate green bonds out of Europe – a fact it is now exploring, to assess the impact it is having on the asset class.

The news came in an ECB response to questions over its approach to financial stability and climate change.

A letter from ECB President Mario Draghi to Ernest Urtasun – an MEP for the Greens/European Free Alliance – repeated its go-to statement about climate change and seemed to avoid a request from Urtasun to provide information on the amount of assets purchased under the Asset Purchase Programme [quantitative easing] by sector by the Eurosystem of central banks.

Draghi instead said that, “in order to ensure the effectiveness of our monetary policy decisions and avoid undue market distortions, the Eurosystem does not discriminate on the basis of the issuers’ economic activity when determining asset eligibility and actual purchases under the APP”. However, he added, a list of bonds purchased under the Corporate Sector Purchase Programme (CSPP) was available online.

The Eurosystem consists of the ECB and the EU’s 19 national central banks that apply its monetary policy: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

Between them, these banks have around €6bn in green bonds, according to Draghi – representing close to 20% of the eligible green bonds under the CSPP. The CSPP, a €140bn initiative, covers bonds of any size from non-bank and non-asset manager corporate issuers that are Euro-zone residents.

Finland’s central bank revealed earlier this year that it was applying “responsible investment standards” to its own investment portfolio, including green bond buying, and the French central bank has a similar approach but RI understands that there has been no conscious attempt to incorporate green bonds into monetary policy or QE decisions, which means €6bn of green bonds are probably incidental.

Draghi reiterated that the ECB is currently investigating “the impact that our purchases have had on the green bond market”.

Green bonds are generally oversubscribed, with many investors calling for more supply to enable them to build dedicated financial products and pursue bigger green bond mandates.

The central banks’ ownership of green bonds could, therefore, be seen as ‘crowding out’ buyers with a meaningful interest in the asset class. On the other hand, the purchases could arguably be spurring on corporate issuance by upping demand.

The ECB’s engagement with climate change and green bonds has been steadily growing over the past 18 months.Despite being targeted over climate risk back in 2012 by investors including Aviva, Axa and Generation, Draghi has been slow to join the chorus of regulatory leaders to pursue analysis and solutions to the issue.

In an economic bulletin last July, the bank said “an awareness of environmental issues, together with ethical and socially responsible behaviour, are important for society, [but] it is up to political decision-makers (in the first instance) to agree on, define and promote appropriate policies and measures”.

“It is not, however, possible to embed these into a large-scale asset purchase programme that is carried out as a temporary monetary policy measure over a relatively short period of time.”

ECB is looking at the impact its purchases have had on the green bond market

In April, the Grantham Institute called out the ECB’s corporate bond purchases as possibly encouraging a “green investment gap”, with more than 60% of the bonds so far coming from sectors responsible for most of the Eurozone’s emissions. MEPs followed up on the report by asking Draghi, unsuccessfully, to clarify the environmental impact of the programme.

On the back of the growing pressure, the ECB has shown signs of being more proactive about climate change in particular, joining the new high-level Network for Greening the Financial System (NGFS) earlier this year, to work with 14 other regulators and central banks on climate risk and financial stability.

A few weeks ago, it said in its latest Risk Assessment that – although climate change didn’t pose a serious short-term risk to the banking sector in Europe – banks should “take adequate action” to manage climate exposure.

Just weeks after that, ECB Executive Board member Benoit Cœuré made a speech in which he claimed “climate change can be expected to affect monetary policy one way or the other… That is, if left unchecked, it may further complicate the correct identification of shocks relevant for the medium-term inflation outlook.”

He said that “Views and opinions certainly differ” about the ECB’s role, “but I would argue that the ECB, acting within its mandate, can – and should – actively support the transition to a low carbon economy, in two main ways: first, by helping to define the rules of the game and, second, by acting accordingly, without prejudice to price stability.”

The ECB is part of the European Commission’s Technical Expert Group on sustainable finance, which is looking at ESG disclosure as one of its four mandates – along with green bond standards, a green taxonomy and low-carbon benchmarks.