ECB signals major shift in handling of bonds based on CO2 record

Paris: The European Central Bank may be about to make life harder for bond issuers with big carbon footprints.

Executive Board Member Isabel Schnabel suggested the ECB may need to start actively reshuffling corporate-bond holdings to better reflect climate risk. The comments, made during a speech on Tuesday, indicate the ECB would no longer make do with reinvesting in greener debt, but start offloading bonds issued by big greenhouse-gas emitters.

“This announcement is bound to have some spread impact, especially negative for the issuers which lack transition potential,” said ABN Amro Bank NV fixed-income strategist Larissa Fritz. “Once formalized the impact will be stronger.”

It’s the latest salvo in an ongoing debate among central bankers as they figure out how to help fight climate change without getting dragged into political battles that could undermine their independence. Some institutions have ensured asset purchases and holdings are less exposed to industries with high greenhouse-gas emissions, though explicit mandates generally limit the options available to policymakers.

Recalibrating bond portfolio

The ECB announced a string of measures last year to recalibrate its bond portfolio in a way that penalizes big carbon emitters while also adjusting its collateral policies. However, its plans drew criticism from some for focusing only on reinvestments and not pursuing asset sales ahead of maturity.

In her speech on Tuesday, Schnabel said the ECB’s existing policy would not “ensure a decarbonization trajectory that is consistent with carbon neutrality of our operations by 2050.” This underlines the need to move from a “flow-based to a stock-based” tilting of its portfolios, she said.

The comments represent a “paradigm shift in central bank climate policy” and address “concerns previously raised regarding the ECB’s policies,” said the Anthropocene Fixed Income Institute, a research group that has previously faulted the ECB’s climate policies as being too weak. “The implications of this in terms of valuation of carbon intensive versus less carbon intensive bonds could be significant.”

Schnabel said any attempt to green the ECB’s stock of bond holdings needs to include its sovereign-bond portfolio. Previously, officials have tended to focus only on corporate holdings. As options, she mentioned increasing the share of green bonds issued by supranational institutions and agencies, as well as a steady reshuffle of its holdings as governments expand their issuance of green bonds.

“This will drive a further push to green” sovereign, supranational and agency debt, the AFII said in a report. And it will “likely reduce exposure to non-Paris aligned SSA issuers.”