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How are we decarbonising our corporate bond holdings?

19 September 2022 (updated on 1 October 2022)

The climate crisis is one of the biggest challenges of our time. It poses severe risks for the economy and it affects price stability, our core mandate as a central bank. This is why we are committed to doing our part in the fight against climate change, within our mandate.

Climate change has an impact on our work in a number of ways, for instance on the climate-related risks of the assets we hold. This is one of the areas where we are taking action: we are decarbonising our corporate bond holdings with the aim of putting them on a path aligned with the 1.5 degree goal of the Paris Agreement. To do that, we are looking at how the companies that issue bonds – known as “issuers” – are working to mitigate their climate impact. Since October 2022, we are buying more from those that do better in this regard and less from those that do worse.

Which corporate bonds did we buy in the past?

As part of our monetary policy, we buy corporate bonds based on a benchmark. It guides us as to how much we allocate to a certain sector or company. Previously, this benchmark mirrored what was available in the market. This means that in general, we bought more from those companies that issued more bonds.

How do our corporate bond holdings expose us to climate risks?

In general, when we buy a bond, we accept to take on the risk that this bond might lose value over time. Climate change can be one reason for this: extreme weather events such as wildfires or floods can hit companies’ or their customers’ premises and destroy their warehouses, manufacturing plants or data centres. This is called “physical risk”.

Companies can also suffer from what are often referred to as “transition risks” – the risks emerging from the transition towards a greener economy. Consumers may want to start buying alternative products, or goods and services could become more expensive as governments impose carbon taxes. At some point, legislators might also ban certain carbon-intensive products. And technical innovation can benefit some companies, while others will find it hard to keep up.

All of these changes could severely hit carbon-intensive firms, such as energy producers or transportation companies that rely on fossil fuels, if they don’t adapt to these changes in time. And if they get into financial trouble because of such events, this affects the value of their bonds.

Why do these physical and transition risks matter for the ECB and the national central banks of the countries in the euro area? The Eurosystem holds bonds from many different companies and sectors, and we are therefore exposed to the risks mentioned above. By decarbonising our portfolio, we aim to reduce our exposure to these risks.

Our measures also support the green transition of the economy in line with the EU’s climate neutrality objectives.

How are we making our purchases greener?

Since October 2022, we are “tilting” our purchases towards companies with a better climate performance. This means that we are increasing the weighting in our portfolio of companies that do better compared to those with a poorer climate-related performance. As a result our portfolio is gradually becoming less carbon-intensive.

We continue to buy bonds from companies across a variety of sectors. The overall size of our purchases continues to be solely guided by our price stability objective. But it is becoming more difficult for companies to get funding if they don’t work on their climate performance.

The overarching goal is to bring our bond portfolio on a path aligned with the goals of the Paris Agreement.

Read this press release and the FAQ for more details.

How does this work in practice?

To assess the climate performance of these issuers we calculate a climate score based on three criteria:

Backward-looking emissions

We check companies’ carbon footprints. We also assess how they fare compared with others in their sector and against all bond issuers that are part of our corporate purchase programmes. Issuers performing better in both aspects get a higher score.

Forward-looking targets

We look at the objectives that companies have set themselves to reduce their emissions in the future. Issuers with more ambitious targets get a higher score.

Climate disclosures

We look at how transparent companies are about their greenhouse gas emissions. Those who publish high-quality data receive a better score.

How does this help address climate change?

Tilting reduces our own exposure to climate-related risk through our bond holdings. At the same time, it creates an incentive for companies across all sectors to become more transparent about their own climate risks and carbon footprint, and to reduce their greenhouse gas emissions. This is one of the ways we contribute to the green transition and the EU’s carbon neutrality objectives.

But it is also clear that we cannot do it alone. Companies must live up to their commitments to reduce their emissions. And of course, tackling climate change is, first and foremost, up to governments and parliaments. They have the best tools available to take on this vital challenge. As the central bank for the euro area, we will do our part within our mandate.