ECB Urged Not to Waste Time in Making Bond Buying Greener

Environmental activists and economists claim there’s a way for the European Central Bank to account for climate risks in its stimulus programs without the time-consuming preparatory work officials often say is needed.

Just last week, ECB President Christine Lagarde said her institution must question whether “market neutrality” -- or mirroring the composition of the bond market with purchases -- is appropriate in light of environmental risks. As far as researchers from the New Economics Foundation, Greenpeace and three British universities are concerned, the answer is no.

ECB Urged Not to Waste Time in Making Bond Buying Greener

Their arguments rest on the idea that investors price debt issued by polluting companies too generously, with borrowing costs further supported by ECB buying.

“The longer the ECB delays the decarbonization of its QE program, the more firms will delay in providing climate-related data and taking action against the climate crisis itself,” they said.

Skewing purchases toward certain assets is a controversial concept within the central bank, with some policy makers arguing the ECB shouldn’t get involved in setting industrial policies. Even those who are sympathetic to the idea have doubts over whether such a step is technically feasible, as it would require more detailed definitions on what constitutes green financing.

While such a so-called taxonomy is in the works at the European Commission in Brussels, it won’t be ready for at least another year. Activists say the ECB shouldn’t wait that long and be a catalyst for change.

Quantitative easing is currently skewed in favor of carbon-intensive sectors and companies, they argue, and maintaining that stance inhibits the transition to a low-emission economy. Instead, the ECB should start replacing those bonds with debt from “potentially green” and renewable sectors to put pressure on companies to provide more information.

The report proposes two alternative approaches that could be implemented right away, even if the availability of data isn’t yet ideal.

In the first, the ECB could adhere to its existing purchase rules, while excluding bonds issued by fossil-fuel companies and those with high emissions. Instead it would buy more debt from renewable-energy firms and sectors identified by the researchers as being in line with the EU’s taxonomy.

A second option would be to ditch the ECB’s eligibility criteria -- it requires bonds to be investment grade to qualify for purchase -- which would further expand the pool of climate-friendly debt available.

Both approaches would allow the ECB to continue buying the volumes of debt needed to counteract the shock unleashed by the global coronavirus pandemic, the report said.

“I would be more in favor of applying this taxonomy right now despite the fact that we don’t have sufficient data,” said Maria Nikolaidi, one of the report’s authors. “I would prefer to give some incentives to these potentially green sectors now that it is early.”

©2020 Bloomberg L.P.

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