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25th Feb 2024

ECB announces major green shift in corporate bond-buying

  • The announcement comes amid growing concern for climate-induced shocks threatening financial stability (Photo: ECB)
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The European Central Bank (ECB) on Monday (4 July) announced it will gradually green €344bn of its corporate debt portfolio, in one of its most significant sustainability shifts yet.

"The Eurosystem will gradually decarbonise its corporate bond holdings," ECB board member Isabel Schnabel said. It will be done gradually in annual redemptions in the coming years.

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Starting from October, the bank will reinvest matured bonds towards more sustainable firms. In making these investment decisions, the ECB will look at past performance, planned carbon-reduction goals and publicly-disclosed climate data.

The ECB will not exclude any companies from its investment operations, hoping access to its green bond buying will "give all those companies an incentive to become greener," Schnabel said.

By greening its bond-buying operations, the ECB aims to bring monetary policy in line with the 1.5-degree goal of the Paris Agreement, thereby limiting the risk of such extreme climate events.

Academia and civil society have long argued for the ECB to green its money lending operations.

"The new rules are by far the most ambitious in the central banking world," Daniela Gabor, a professor of economics and macro-finance at the University of the West of England and one of the authors of a 2020 paper on the subject, tweeted on Monday.

The ECB also plans to limit the share of polluting assets commercial banks can use as collateral when borrowing funds from the central bank — further limiting polluting bond issuance.

Climate risk

The announcement comes amid growing concern among central bankers for extreme environmental or climate-induced shocks threatening financial stability — so-called 'green-swan events'.

ECB president Christine Lagarde in July 2020 already promised to green monetary policy.

Executive member Frank Elderson, in charge of the bank's greening operations, has called it the "single most defining issue for humankind."

But conservative members of the bank's governing council have resisted the ECB's greening efforts.

In April, Belgian central banker Pierre Wunsch said it was not the role of monetary policy to distinguish between high and low-carbon asset purchases.

He is among those who cling to the controversial notion of "market neutrality", which believes central bankers should not meddle in credit flows as financial markets (investors and commercial bankers) are better able to direct the money where it is needed.

But in a paradigm-shifting speech in June 2021, Schnabel dealt a blow to this idea when she admitted that central bank lending operations "exhibit an inherent bias towards large firms in carbon-intensive industries" because those businesses typically issue bonds to finance their operations.

Rather than being 'market neutral', the corporate bond-buying schemes as developed by the ECB in response to the financial crisis and the pandemic have overly benefited fossil fuel companies and heavy industry in conflict with the EUs climate agenda.

And as Schnabel concluded in June last year, the ECB is legally "required" to help prevent climate change from destabilising the economy, adding that the principle of market neutrality should be "replaced."

A message she repeated on Monday's key bond buying decision.

"This market is heavily biased towards emission-intensive firms therefore, we will then have a new benchmark tilted towards less emission-intensive firms," Schnabel said.

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