Market neutrality has created ‘massive carbon bias’ in Europe’s QE programme, finds study

Excluding bonds from fossil fuel and carbon intensive firms would leave €1trn investable universe, down from €1.5trn

The European Central Bank’s (ECB) corporate QE programme has a “massive carbon bias” that is “misaligned with EU commitments to the Paris Agreement”, a new study has found, in the latest call for the European supervisory body to drop market neutrality in a bid to tackle the climate crisis. 

The paper, published by UK thinktank the New Economics Foundation, Greenpeace and various UK universities, says the skew towards carbon-intensive sectors in the ECB’s corporate sector purchase programme (CSPP) represents “an important barrier to the decarbonisation of the euro area economies”. 

ECB President Christine Lagarde has promised to explore every avenue of greening the ECB’s operations, of which its corporate QE programme is just one part. Both Lagarde and ECB executive board member Isabel Schnabel have questioned the notion of market neutrality in recent weeks, saying a market that has failed to correctly price climate risk may not be an appropriate benchmark for central banks. 

Now, the new NEF and Greenpeace paper has found four carbon intensive sectors make up approximately 62.7% of the value of the ECB’s corporate bond holdings, including some of the most emissions-intensive companies in Europe. 

The contribution of these sectors to employment and gross added value in the euro area is 17.8% and 29.1%, respectively, which the paper says shows the CSPP is “significantly skewed towards the most carbon-intensive sectors”. 

The paper found the renewable energy sector was not sufficiently represented in the ECB purchases, with proportionally fewer bonds purchased despite them meeting ECB eligibility criteria. 

“An important consequence of the carbon bias is that it may lower the cost of borrowing (an implicit subsidy) and encourage more debt issuance by the most carbon intensive firms, relative to low-carbon firms,” the report said. 

The researchers – NEF senior economist Frank van Larven, Greenpeace’s Adam Pawloff, and UK academics Yannis Dafermos, Daniela Gabor and Maria Nikolaidi – said their analysis shows how the ECB could decarbonise its QE programme. 

While the current eligible bond universe consists of 2,715 bond issues with a total value of just over €1.5trn, the researchers found the ECB could choose from 1,829 corporate bonds worth just over €1trn if it excluded fossil fuel and carbon intensive firms. 

The authors estimated the ECB could even axe all bonds issued by carbon-intensive sectors apart from green bonds and still have €1.078trn worth of debt in which to invest, if it included junk-rated paper.

According to the paper, these strategies would make companies’ access to finance more aligned with the targets of the Paris Agreement and significantly reduce the climate footprint of the ECB corporate QE programme.  

In an online discussion this morning, Christine Lagarde said the report was “helpful to have on the table for discussion purposes, including for those not necessarily as convinced as I am”.

“Hopefully we can convince all those who don't see [addressing climate change] as clearly in the mandate of the central bank that taking that on board is part of our duty – number one because it impacts on price stability, and number two, it's an issue of good risk management,” she said.