Decarbonising is easy

Beyond market neutrality in the ECB's corporate QE

In July 2020, Christine Lagarde, the President of the European Central Bank (ECB), promised to explore every avenue for greening the ECB’s operations, including the asset purchase scheme undertaken to help stimulate the Eurozone economy. Indeed, the rapid and profound economic devastation brought on by the coronavirus pandemic illustrates the vulnerability of our economies to catastrophic shocks and should prompt central banks to hasten progress towards a low-carbon transition. The ECB simply cannot afford to address one crisis whilst neglecting – if not worsening – another.

Central banks in general are hardly the only game in town when it comes to tackling environmental breakdown. Yet they do have a critical role to play in structurally realigning our financial sector with the challenges and risks posed by the climate crisis. Responsible for monetary policy and large swathes of financial regulation, the ECB’s operations heavily influence the allocation of financial flows and market prices. Now is the time to consider how Europe’s most powerful economic institution can ensure its operations are aligned, rather than at odds, with the goals of a green transition.

In this brief, we first document the ECB’s ongoing carbon bias in one key pillar of its Quantitative Easing (QE) program – corporate bond purchases. The ECB does hold a significant amount of green bonds (debt instruments earmarked specifically to finance climate and environmentally friendly projects). But overall its corporate purchases are structurally misaligned with EU commitments to the Paris Climate Agreement and do not adequately reflect climate-related financial risks. In fact, by implicitly creating better financing conditions for carbon-intensive activities, the Corporate Sector Purchase Programme (CSPP) biases the allocation of capital towards the most carbon-intensive sectors. Therefore, it is particularly significant that the ECB does explore every avenue available to decarbonise its monetary policy operations and align them with democratically defined objectives of a green transition. It has already taken the welcome step of including sustainability-linked bonds in the list of assets that it accepts as collateral for lending operations. But it needs to go further, faster.

To do so, we argue, it needs to reconsider the so-called market neutrality’, the underlying principle that guides corporate asset purchases and hardwires a carbon bias into its unconventional purchases. The ECB has recently admitted that market neutrality might be problematic as a benchmark given that the markets have failed to produce climate-efficient outcomes. We agree with that and we suggest two alternative scenarios that would reduce significantly the climate footprint of the ECB’s corporate QE purchases. In the lower-carbon’ scenario, the ECB stops buying bonds issued by fossil fuel companies and by companies with relatively high carbon intensity that belong to the energy-intensive, non-renewable utilities and carbon-intensive transportation sectors. Instead, the ECB would purchase bonds of potentially green and renewable sectors, as well as green bonds and bonds of other’ non-carbon-intensive sectors. The second, low-carbon’ scenario excludes all the bonds issued by carbon-intensive sectors, apart from green bonds, but relaxes the investment grade criterion.

Implementing these would not only be in line with the climate emergency that we are currently facing but would also support climate-related financial stability objectives.

Image: Kiefer (CC BY-SA 2.0)

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