ECB set for greener ‘tilt’ in €386bn corporate bond portfolio

The European Central Bank will shift the corporate bonds it owns and accepts as collateral away from the most carbon-intensive companies, going further than most big rate-setting authorities but disappointing activists eager to see stronger measures.

Announcing plans to “tilt” its €386bn portfolio of corporate bonds away from companies with “a poorer climate performance”, the ECB said it “aims to gradually decarbonise its corporate bond holdings” in line with the 2015 Paris Agreement to limit global warming.

The central bank said it would also limit the share of non-financial corporate bonds with a “high carbon footprint” it accepts as collateral from individual counterparties, while requiring climate risk disclosure to hit certain levels before an asset or loan is accepted as collateral.

ECB president Christine Lagarde, who has made fighting climate change a key focus of her leadership, said: “Within our mandate, we are taking further concrete steps to incorporate climate change into our monetary policy operations.”

She added “there will be more steps” in future to align the ECB’s activities with the Paris Agreement to limit global warming to 1.5C since pre-industrial times. Temperatures have already risen at least 1.1C.

The plan is more expansive than those announced by the Bank of England, which said last year it would refocus its corporate bond holdings on greener companies, and Sweden’s Riksbank, which said last week it would only buy the bonds of companies that disclosed their climate risks sufficiently.

However, campaigners expressed disappointment that the ECB had not gone further. Greenpeace finance expert Mauricio Vargas said the measures announced on Monday were “overdue”, adding that the ECB “should actively sell the bonds of companies, like the big fossil fuel groups, that are not aligned with the goals of the Paris Agreement”.

Stanislas Jourdan, executive director of campaign group Positive Money Europe, said he was “quite encouraged” by the ECB’s planned carbon-based limits on its collateral system, which he said “signals a move towards a near-exclusion of certain high carbon assets”.

The ECB first announced plans to shift its corporate bond purchases and collateral rules away from heavy carbon-emitting companies last year when it presented the results of a strategy review. It has been criticised by some observers for focusing on green issues when they say it should have concentrated more on preventing inflation in the eurozone from hitting a high of more than quadruple its 2 per cent target.

The ECB on Monday defended the measures, however, saying they “aim to better take into account climate-related financial risk in the eurosystem balance sheet and, with reference to our secondary objective, support the green transition of the economy in line with the EU’s climate neutrality objectives”.

The shift in its corporate bond portfolio will come into force in October and will only affect how it reinvests the proceeds of maturing bonds it already owns after it stopped expanding its balance sheet last week.

Corporate bonds make up less than 8 per cent of the overall €4.95tn of assets the ECB has bought under its quantitative easing policy, most of which are sovereign bonds.

The carbon-based collateral limits on individual counterparties will come into force “before the end of 2024” and apply only to the assets issued by non-financial companies, which make up less than 3 per cent of the total collateral held by the ECB, after valuation adjustments, at the end of March.

The ECB added that it would consider climate risks when adjusting the value of corporate bonds using accounting “haircuts” from this year. It will also push rating agencies to be more transparent and ambitious in how they assess climate risk at the companies they analyse.

The new disclosure requirements for assets to qualify as collateral will only come into effect once the EU’s corporate sustainability reporting directive is fully implemented as expected in 2026, it said.

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