Insurance

ECB to Limit Purchases of Longer-Term Debt Issued by Climate Laggards



The European Central Bank will limit purchases of longer-term debt issued by companies that rank poorly under a new scoring system created to screen out polluters and tackle climate change.

The maturity limit will cut the “longer-term exposure of the Eurosystem to transition risks,” according to a statement Monday. The ECB will also give “special treatment” to green bonds meeting “stringent” requirements and buy more securities from high scorers.

It’s the first detailed look at how the institution will reinvest “sizable redemptions” expected in the coming years. About 30 billion euros ($30 billion) — 10% of its corporate-bond portfolio — will be reinvested each year in what’s been hailed as the “most ambitious” plan by a central bank to address climate change.

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The asset-allocation initiative will enable the ECB to meet its twin goals of reducing exposure to climate-related financial risk and supporting “the green transition of the economy in line with the European Union’s climate-neutrality objectives,” the ECB said.

Central banks globally have been under pressure to do more to ensure the Paris Agreement is met as extraordinary fires, droughts and floods underscore the damage wrought by rising temperatures. A dozen nonprofit organizations this month urged the ECB to make science-based emission-reduction targets a requirement amid concerns that companies are making inflated claims.

On Monday, the ECB said issuers whose decarbonization plans are science-based and verified by a third party will get higher marks under its new scoring system. Higher rankings will mean more purchases.

The ECB said it will tilt the benchmark guiding its buying to higher scorers, and will raise limits on how much it purchases from each issuer so it can buy more bonds from the better performers.

Its practice has been to buy more bonds from big issuers. In the future, market capitalization size will be supplemented by the climate score. That’s comprised of three parts: past emissions, including sector-level Scope 3 pollution (those generated by a product or service’s use); future emissions, including reduction plans; and quality of disclosures.

The ECB said it will favor companies that provide “high-quality” emissions reports and ambitious decarbonization plans. Those that don’t have self-reported emissions data, provide little information and have weak or no plans to address climate change will get low scores.

The ECB said it won’t publish the climate scores of individual issuers, to avoid reducing the effectiveness of its purchases and undermining its monetary-policy objectives, including inflation targeting. Those will continue to determine the overall volume of bond purchases.

Over time, the selection process will result in an improved average climate score for the entire portfolio, with a pathway that will ensure meeting the Paris Agreement, the ECB said. The bank said it’ll review how well the approach is working after a year, and may change it if necessary.

Some climate groups said the ECB didn’t go far enough, and should have simply excluded high emitters — including the oil and the gas industry.

“The ECB’s plan means continued support to fossil-fuel firms that are doing the most damage to both the environment and inflation,” Paul Schreiber, an analyst at Reclaim Finance, said in a statement. “The central bank keeps on contributing to the EU’s fossil-fuel dependency and fails to support its clean-energy transition.”

–With assistance from Carolynn Look and John Ainger.

Photograph: The European Central Bank (ECB) headquarters in Frankfurt, Germany, on Thursday, Sept. 8, 2022. Photo credit: Alex Kraus/Bloomberg

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