ECB Says More Equity Financing Will Cut Carbon Emissions
ECB Says More Equity Financing Will Cut Carbon Emissions
(Bloomberg) --
Expanding stock markets could be good for the earth, according to research from the European Central Bank.
Economies receiving more funding from stock markets than credit markets generate less carbon, it said in a paper published Wednesday. Increasing the global share of equity financing to half would reduce aggregate per capita carbon emissions by about a quarter of the Paris Agreement commitment, which pledges a reduction of 40% by 2030.
“If a country wants to decarbonise its economy, it should not only promote green finance initiatives such as green bonds, but also develop its equity markets,” authors Ralph de Haas and Alexander Popov wrote.
Vice President Luis de Guindos had a similar message last week, saying stock investors are needed in the transition to a low-carbon economy. It’s part of a broader discussion on sustainable and responsible investment, as central banks and supervisors face increasing pressure to look at their own scope for action as climate change becomes a fixture in public debate.
The ECB’s research showed that stock markets are better than banks at reallocating investment toward greener sectors, and deeper stock markets correlate with more green patenting in traditionally carbon-intensive industries.
A tendency of equity markets to encourage technological advancement is also part of the greener skew. In countries with more stock market depth, innovative sectors with fewer tangible assets grow faster, while carbon-intensive sectors rich in tangible assets expand more quickly in economies that rely more on bank financing, the paper noted.
The authors also cite legal risk, and the idea that equity investors may push firms to go green to avoid environmental disasters and their related litigation costs.
To contact the reporter on this story: Yuko Takeo in Frankfurt at ytakeo2@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien, Brian Swint
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