The European Central Bank signaled it may rebalance portfolios that don’t deliver on climate targets, as part of a plan to make its monetary policy greener.
The ECB’s Governing Council will set interim emission-reduction targets for the corporate portfolios of its asset and pandemic emergency purchase programs, according to a climate report released on Tuesday.
These will be set using requirements from the European Union’s climate benchmarks legislation as a guide, including a mandatory 7% annual decline in emissions.
The ECB is taking a more activist role in addressing climate change than other major central banks like the Federal Reserve. It announced plans in 2022 to adjust its corporate bond portfolio to favor issuers that pollute less, marking a significant shift to weave environmental considerations into monetary policy.
Setting short-term milestones will ensure the existing long-term goal of net zero by 2050 is achieved, the ECB said. The decarbonising of the corporate bond holdings is partly dependent on factors out of the bank’s control, including how effective companies are in carrying out their transition plans, the report said. Other factors include bond market conditions and issuance patterns.
For now, the targets will be used to track progress in meeting portfolio goals, it said. Potential “remedial actions” will be considered “on a case-by-case basis” if the ECB identifies “deviations from the desired trajectory” for the portfolios.
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“To reduce the carbon footprint of our portfolio, in particular for public-sector assets, we depend on issuers delivering on commitments to lower their associated emissions,” ECB President Christine Lagarde said in a statement. “Ultimately, action needs to be taken at issuer level for the economy to decarbonise.”
In addition to setting targets, the ECB also has expanded the scope of assets that are subject to a climate review, from EUR395 billion ($573.17 billion) in last year’s assessment to EUR4.5 trillion in Tuesday’s report. That includes holdings of public-sector assets and covered bonds, as well as foreign reserves, in addition to the corporate sector assets that were in focus last year.
“We now disclose climate-related information for over 99% of the Eurosystem’s assets held for monetary policy purposes under the asset purchase program and the pandemic emergency purchase program,” Lagarde said. And available data “point toward a gradual reduction in emissions for these investment classes”.
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Corporate assets’ weighted-average carbon intensity, which measures emissions relative to revenue, declined 50% from 2018 to 2022, according to the ECB’s assessment of its holdings. Other assets saw declines of 15% to 63% in emissions from their own operations and power usage. The data excluded value-chain emissions, known as Scope 3, which are among the most difficult to measure and for companies to cut.
“Issuers in aggregate became more carbon-efficient owing to a combination of declining emissions and an increase in the respective normalisation factors such as revenues,” according to the report. Rising prices also helped, the ECB said.
“Inflation had a positive impact on issuers’ carbon efficiency, which could lead to a downward bias of inflation-unadjusted metrics such as the WACI over time,” the ECB said. The bank said it will work with standard-setting bodies to address the lack of a methodology for accounting for inflation.
