ECB sets stricter climate targets for portfolio

The European Central Bank (ECB) on Tuesday said it would introduce greenhouse gas emissions reduction targets for its corporate bond portfolio and may even sell some assets if it fails to meet its goals. 

The ECB holds about 350 billion euros ($376 billion) in corporate debt, which it purchased as part of a stimulus scheme over the past decade. In recent years, it has been pushing companies in this portfolio to adopt greener policies. However, the slowing and imminent halt of reinvestments in its (nearly defunct) Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) has forced the bank to find a new route to encourage corporate participation. 

"Interim emission reduction targets will be set for the corporate portfolios in the APP and PEPP," the ECB said, adding that EU regulations will be used as guidance in setting goals.

"If deviations from the desired trajectory are identified, remedial actions will be assessed, within our mandate, on a case-by-case basis," the ECB added, though it did not discuss what these actions could entail. 

The ECB’s plan was approved by policymakers, though no timeframe has been set, and a fresh decision will be needed before it takes effect. 

The bank added that the climate footprint of its portfolio is largely outside of its control, and it instead depended on market conditions, individual firms’ performance, and bond issuance patterns. 

“To reduce the carbon footprint of our portfolio, in particular for public sector assets, we depend on issuers delivering on commitments to lower their associated emissions," said ECB President Christine Lagarde. "Ultimately, action needs to be taken at issuer level for the economy to decarbonise. This is what matters most to put the world on track towards net zero carbon emissions.”

According to the ECB’s disclosures, there has been a notable decrease in the emissions of its new purchases since the introduction of its climate-conscious tilt in 2022. The tonnes of CO2 per millions of Euro of revenue fell by more than 35% between 2021 and 2023, it said. 

Approximately one-fifth of the reduction in 2022 and 2023 was due to efforts to tilt reinvestments towards greener issuers. Over time, the tilting initiative is likely to increase its contributions to portfolio decarbonisation, with the bank noting that the emissions intensity of its purchases in 2023 fell 70% compared to the year prior to the framework.

The bank said that issuer decarbonisation was the main force behind the decrease in its portfolio emissions, though it noted that the use of intensity metrics could have skewed the number due to rising inflation. There was no widely-used methodology to adjust for this, the bank said, adding that it will collaborate with standard setters to create better metrics for accurately capturing issuer decarbonisation.