ECB provides further details on decarbonising corporate bond holdings

In a press release of 19 September, the European Central Bank (ECB) announced that has published further details in an FAQ on how it aims to gradually decarbonise the corporate bond holdings in its monetary policy portfolios, on a path aligned with the goals of the Paris Agreement. 

This includes reducing the Eurosystem’s exposure to climate-related financial risk by tilting its corporate bond purchases towards issuers with better climate performance (as outlined in its July 2022 announcement – see our previous blog post: ECB introduces new measures to combat climate change in monetary policy operations).

The ECB will use issuer-specific climate scores (which they will calculate using three sub-categories: backward-looking emissions, forward-looking targets and climate reporting/disclosures) for decarbonisation. The metrics will be based upon publicly available data and the methodology is guided by the requirements for climate transition benchmarks and Paris-aligned benchmarks pursuant to EU regulation.

Corporate bond holdings will be titled towards issuers with better scores and this tilting will be applied to all corporate bond purchases settled as of 1 October 2022. The intended result is the purchase of more bonds issued by companies with good climate performance and fewer bonds from those with a poor climate performance.

The climate score will be reviewed after one year, at the latest, and may be amended if warranted.

In addition, the Eurosystem will use a differentiated bidding approach in the primary market to favour issuers with higher climate scores, also allowing for favourable treatment of green bonds that comply with a stringent identification process (which include: (1) alignment of the green bond framework with a leading market standard such as the ICMA Green Bond Principles or Climate Bonds Initiative, (2) a second party opinion confirming adherence to that standard and (3) a commitment to regular third-party verification until full deployment of the issue proceeds).

Finally, the Eurosystem will employ other measures, such as maturity limits for lower-scoring issuers, to further mitigate its climate-related financial risk.

The ECB will start publishing climate-related information on its corporate bond holdings as of the first quarter of 2023.

The operation of this methodology to realign ECB holdings is expected to incentivise eligible issuers to decrease carbon emissions, plan and set up ambitious forward-looking decarbonisation targets and reward issuers with high-quality disclosure.