ECB Officials Consider Climate Leap For Corporate Bond Program

European Central Bank policy makers are airing their boldest views yet on how to introduce climate criteria for their corporate bond-buying program, opening a new front in a controversial debate over how to make monetary policy greener.

Speaking at a conference on climate finance in Paris, Bank of France Governor Francois Villeroy de Galhau argued for “decarbonizing 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 or taken as collateral.”

His Dutch colleague Klaas Knot concurred at a separate event that central banks “could explore how, within the boundaries of their mandates, they can redesign their monetary policy instruments” to prevent favoring carbon-intensive assets. Both policy makers’ remarks come amid increasing calls for central banks to take a more active role in supporting the transition to a greener economy.

The ECB has been buying corporate bonds since 2016 but has so far avoided actively discriminating against certain assets on the basis of environmental criteria in its quantitative-easing programs. Some officials are concerned that they risk being diverted from their mandate of price stability, and undermining their independence by choosing which industries to support.

Still, President Christine Lagarde has made clear that she won’t stay out of the fight against climate change, telling European Parliament lawmakers this week her institution is “determined” and will “do more.”

Villeroy said the ECB could “tilt” its purchases of corporate bonds to limit issuers with a poor climate performance and favor those who are aligned with commitments to reduce global warming. For collateral posted against central-bank loans, the valuation of assets should be adjusted according to transition risk.

He argued that climate is linked to price stability because it can impact inflation. He listed the possibility of climate shocks being stagflationary by driving up prices and suppressing activity; the higher costs of transitioning to cleaner energy; the impact on food costs; and a link between higher temperatures and productivity. Lagarde made similar arguments during her parliamentary speech.

“The Eurosystem’s consideration for climate change is neither an abuse of its mission, nor a mere militant belief or fad; it is an imperative that we must pursue in the very name of our current mandate and to ensure the smooth implementation of monetary policy,” Villeroy said.

The Bank of France governor said his proposals don’t cover sovereign assets because it’s too difficult to differentiate between the policies of different governments. Focusing on corporate bonds is more appropriate, he said, as there are already climate indicators for most businesses.

While Knot didn’t go into as much detail on what the ECB should do, he did say central banks could help unlock green investments by correcting the carbon bias in capital markets. Purchases currently mirror the composition of the corporate-debt market, in which he said the relative price of carbon emissions is “distorted.”

“We could take the existing EU policies, such as the Non-Financial Reporting Directive and the EU taxonomy for sustainable activities, as a starting point in this respect,” he said.

The ECB’s current contributions to tackling global warming include incorporating risks in their own models and projections, as well as encouraging more transparent disclosure from market participants.

It is using climate criteria for its own-funds portfolio, and has announced the formation of a new climate change center to coordinate its work on how to help fight global warming.

Villeroy acknowledged that his proposed program for climate action is “ambitious,” but said it could still be decided on by the end of the year and implemented in three to five years.

“This ambition requires great dexterity; but it is rooted in a conviction: we have in our hands the tools to move forward, concretely, strongly,” he said.

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