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

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The European Central Bank will shift the company bonds it owns and accepts as collateral away from essentially the most carbon-intensive firms, going additional than most huge rate-setting authorities however disappointing activists desirous to see stronger measures.

Announcing plans to “tilt” its €386bn portfolio of company bonds away from firms with “a poorer climate performance”, the ECB stated it “aims to gradually decarbonise its corporate bond holdings” consistent with the 2015 Paris Agreement to restrict world warming.

The central financial institution stated it will additionally restrict the share of non-financial company bonds with a “high carbon footprint” it accepts as collateral from particular person counterparties, whereas requiring local weather threat disclosure to hit sure ranges earlier than an asset or mortgage is accepted as collateral.

ECB president Christine Lagarde, who has made preventing local weather change a key focus of her management, stated: “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 actions with the Paris Agreement to restrict world warming to 1.5C since pre-industrial instances. Temperatures have already risen no less than 1.1C.

The plan is extra expansive than these introduced by the Bank of England, which stated final 12 months it will refocus its company bond holdings on greener firms, and Sweden’s Riksbank, which stated final week it will solely purchase the bonds of firms that disclosed their local weather dangers sufficiently.

However, campaigners expressed disappointment that the ECB had not gone additional. Greenpeace finance skilled Mauricio Vargas stated the measures introduced on Monday had been “overdue”, including 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, government director of marketing campaign group Positive Money Europe, stated he was “quite encouraged” by the ECB’s deliberate carbon-based limits on its collateral system, which he stated “signals a move towards a near-exclusion of certain high carbon assets”.

The ECB first introduced plans to shift its company bond purchases and collateral guidelines away from heavy carbon-emitting firms final 12 months when it offered the outcomes of a method assessment. It has been criticised by some observers for specializing in inexperienced points after they say it ought to have concentrated extra on stopping inflation within the eurozone from hitting a excessive of greater than quadruple its 2 per cent goal.

The ECB on Monday defended the measures, nevertheless, 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 company bond portfolio will come into pressure in October and can solely have an effect on the way it reinvests the proceeds of maturing bonds it already owns after it stopped increasing its stability sheet final week.

Corporate bonds make up lower than 8 per cent of the general €4.95tn of property the ECB has purchased underneath its quantitative easing coverage, most of that are sovereign bonds.

The carbon-based collateral limits on particular person counterparties will come into pressure “before the end of 2024” and apply solely to the property issued by non-financial firms, which make up lower than 3 per cent of the overall collateral held by the ECB, after valuation changes, on the finish of March.

The ECB added that it will take into account local weather dangers when adjusting the worth of company bonds utilizing accounting “haircuts” from this 12 months. It may also push ranking businesses to be extra clear and bold in how they assess local weather threat on the firms they analyse.

The new disclosure necessities for property to qualify as collateral will solely come into impact as soon as the EU’s company sustainability reporting directive is totally carried out as anticipated in 2026, it stated.

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Source: www.ft.com