ECB developing an appetite for green bonds

In a recent interview Christine Lagarde, president of the European Central Bank, announced that they will begin to use the bank’s asset purchase scheme to pursue green objectives. “I want to explore every avenue available in order to combat climate change” she told the Financial Times. Particular focus has been placed by the market on the potential of the ECB to focus on the purchase of green bonds by the scheme.

This marks the first time a major central bank has committed to use their bond purchasing to address climate issues. The involvement of the €2.8trn scheme will be a valuable addition to the growing number of investors, governments, regulators and other institutions working to direct further capital towards climate finance. The inclusion of climate change on the ECB’s strategic agenda is also important to help deliver the goals of EU Green Deal and relevant ahead of COP26 in 2021. This package of measures is designed to deliver on the EU commitment to achieve net carbon neutrality by 2050 and has been estimated to involve €1trn of investment and be the focus of around 25% of future EU budgets.

However, as President Lagarde said it is very important that they look at all financial avenues to address climate change. Despite the impressive growth of the global green bond market, it shouldn’t become seen as a “silver bullet” at the expense of other options. Indeed, you could argue that this latest announcement is nothing new as the ECB has already been purchasing green bonds as part of their previous programs, and at the end of 2019 they already owned 24% of eligible euro-area public sector green bonds and 20% of eligible euro-area corporate green bonds. Having such a large institutional buyer in the market for what is a relatively low yielding and low liquidity asset class has the potential to impact on the attractiveness of the market to third party investors, despite attracting new issuers.

As always, the devil will be in the details. How this is implemented in practice, and how it makes a positive impact on climate finance flows while not skewing the market, will be a tricky tightrope to walk. Areas such as green bond definitions and the extent to with which they include broader groups of sustainable bonds, such as transition bonds, will be important both in addressing the widest extent of climate change issues and maximizing the eligible pool of bonds the ECB can draw upon. They will also need the ability to respond to the rapidly evolving sustainable investment market and not stifle innovation. The London Stock Exchange has helped to issue over £45bn of COVID-19-related pandemic bonds since March, a market segment none of us would have envisioned six months ago. This has eclipsed the £15bn of other green, social and sustainability bonds issued (through the exchange) over the last 12 months.

Along with green bonds, there are many other avenues where the ECB and the broader investment community can help to finance the climate transition. This can range from specific, direct green infrastructure investment to supporting collaborative initiatives like CA100+ and TPI and international disclosure standards like TCFD, and sources of climate performance analysis that hold issuers to account on their climate performance, be they corporates or even sovereigns, thereby helping to direct the flow of general investment funds towards positive climate impact, even if not specifically labelled as green.

As an institution that helps both issuers and investors access the green bond market, we welcome and commend both President Lagarde’s comments and the ECB proactive actions that aim to maintain the growth and vibrancy of the green bond market. The ECB could build on this further and use its considerable assets to influence a variety of wider climate initiatives, tools, policies and green investment approaches.

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