Green tilt has significantly reduced bond purchases’ carbon intensity, says ECB

The European Central Bank (ECB) reduced the carbon intensity of its bond purchases by 65 percent in Q4 2022, compared with the first three quarters of the year, after introducing a “tilt” to greener issuers.

The ECB today reported a carbon intensity of just under 200 tonnes of CO2 per million euros in revenue for its corporate bond buying activities in Q4 2022, compared to nearly 400 tonnes for the months earlier in the year.

This is the first time that the ECB has disclosed carbon metrics for its nearly €400 billion euro-denominated corporate bond portfolio, delivering on a commitment made in 2021.

The green tilt, introduced last October, means the ECB will reinvest proceeds from maturing debt into companies with better climate performance, in addition to imposing maturity limits on long-dated bonds from companies identified as climate laggards. Companies are scored internally by the ECB on their climate performance based on ISS and Carbon4 data.

But the impact of the ECB’s greening programme on its total real-world emissions is uncertain as it will only affect how the ECB reinvests the proceeds of maturing bonds. The bulk of its existing portfolio will remain unchanged.

ECB disclosures show that absolute financed emissions associated with the portfolio ballooned by 89 percent between 2019 to July 2022, driven by substantial increases in net holdings during the covid-19 pandemic.

The impact of the tilt will be further reined in following the ECB’s recent decision to taper off reinvestments of proceeds and to trim its bond holdings, at an average pace of €15 billion per month from March through June, as it battles record inflation.

The central bank has already announced a stronger green tilt to maintain its portfolio’s decarbonisation rate, and has confirmed that proceeds from maturing bonds in excess of the €15 billion figure will continue to be reinvested in green bonds, and issuers with good climate performance.

An alternative is for the ECB to apply the tilt to its existing holdings, as proposed by ECB executive board member Isabel Schnabel earlier this year. The ECB should not initially divest from companies that still need to transition, she said at the time, but should “foster incentives for them to reduce emissions further”.

She warned that the ECB’s greening programme will have “lost part of its punch” with the dwindling of bond purchases.

The disclosures released today also show that the ECB has more than halved emissions from its staff pension fund’s equity and corporate bond investments since 2019 – accounting for around three-quarters of its overall assets.

The ECB has integrated climate factors into the management of its retirement assets for the past five or so years. In 2020, the €1.8 billion fund switched out all conventional equity benchmarks for their low-carbon equivalents, which reduced the carbon footprint (calculated by averaging tonnes of CO2 over millions of euros invested) of equity investments by 60 percent, as of 2022.

The fund also reinvested assets allocated to corporate bond benchmarks in Paris-aligned Benchmarks, which halves the carbon footprint of the parent index and slashes it by a further seven percent per annum.

The ECB reported marginal changes in the carbon footprint of its €21 billion own funds portfolio, which generates income from sovereign investments to fund operating expenses not related to the ECB’s supervisory tasks.

According to the ECB, different methods of calculating carbon intensity yielded different results for this portfolio. The results should also be interpreted with caution, it said, due to the temporary distorting effects of the pandemic and a two-year delay in obtaining sovereign emissions data.

Separately, the Basel Committee on Banking Supervision has indicated that it will consult on a proposed Pillar 3 disclosure framework for climate-related risks by the end of the year.

The current Basel Pillar 3 framework sets broad global disclosure requirements for different financial institutions but does not have an explicit focus on climate. It comes after the EU introduced new Pillar 3 requirements in 2022, which include the green asset ratio (GAR) and banking book taxonomy alignment ratio (BTAR) as measures of green exposures.