ECB urged to ‘decarbonise’ its €2.4tn corporate credit holdings


France’s central bank governor has called for a “decarbonisation” of the multitrillion-euro holdings of corporate bonds at the European Central Bank, intensifying the debate on how far monetary policy should go in tackling climate change.

François Villeroy de Galhau said the ECB should adjust the amount of corporate bonds it buys and the value of the collateral it accepts depending on how aligned companies are to achieving the goals of the international climate agreement to limit global warming.

“I propose to start decarbonising the ECB’s balance sheet in a pragmatic, gradual and targeted manner for all corporate assets, whether they are held on the central bank’s balance sheet as purchases or taken as collateral,” Villeroy told an online event on Thursday. 

At a separate event, Dutch central bank governor Klaas Knot said central bankers “could explore how, within the boundaries of their mandates, they can redesign their monetary policy instruments” to adjust for the risk of climate change. 

Christine Lagarde, the ECB’s president, has pledged to make tackling climate change a major part of the central bank’s strategy review, which is due to be completed by September.

The ECB’s governing council, where Villeroy and Knot are both members, is due to discuss the implications of climate change later this month as part of its strategy review, and the Banque de France governor’s comments appeared to be an attempt to shape that debate.

François Villeroy de Galhau’s proposal is likely to be opposed by other ECB council members © Jason Alden/Bloomberg

Villeroy said the ECB “could use indicators that measure the effort that an issuer makes over a given period to reduce its carbon emissions compared with its peers in the same economic sector”. He added: “Here, we have most of the data.” But he said his proposals did not cover sovereign bonds, which make up the majority of the bank’s asset portfolio, because it was “very difficult to differentiate between the climate policies” of different countries.

The central bank could apply a “valuation adjustment” to the corporate and bank bonds it accepts as collateral and limit its purchases of securities from “issuers whose climate performance is not compatible with the Paris agreement,” he said. 

Signatories to the 2016 Paris Agreement pledged to keep global warming below 2C compared with pre-industrial levels by achieving net zero emissions by 2050. The pledge was given extra momentum by US president Joe Biden’s move to rejoin the agreement.

“One area where the Europeans are moving much faster than anyone else is on greening the financial system” said Reza Moghadam, chief economic adviser at Morgan Stanley. “The ECB may not go quite as far as governor Villeroy has proposed today but there is likely to be some traction at the central bank on moving away from market neutrality and making its collateral rules and bond purchases more green.”

Opinion is split over whether the ECB should apply climate change criteria to its vast portfolio of corporate and bank bonds and break with its long-held “market neutrality” principle to only buy bonds in proportion to the overall market. 

At the end of last year, the ECB held more than €2.1tn of bonds and credit issued by banks and companies as collateral against loans as well as more than €270bn of corporate bonds bought under its asset-purchase programme.

Environmental campaigners have criticised the ECB’s corporate bond purchases for reinforcing the market’s bias in favour of heavy carbon emitters such as oil and gas companies, utilities and airlines because these sectors issue more bonds than most others.

However, Villeroy’s proposal is likely to be opposed by other ECB council members, such as Jens Weidmann, head of Germany’s central bank, who wrote in the Financial Times recently that “it is not up to us to correct market distortions and political actions or omissions”.

Villeroy said: “We cannot do everything — nothing will replace an appropriate carbon price and therefore, let me be clear, a carbon tax in one form or another. But we can do a lot.” He described adapting monetary policy tools for climate change risk as the “new frontier” adding that it could be decided in the next year and implemented in three to five years.

This story has been amended to correct the amount of corporate credit held by the ECB.

Climate Capital

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