ECB changes bond rules to account for climate change

The Governing Council of the European Central Bank (ECB) will now account for climate change in its corporate bond purchases, collateral framework, disclosure requirements and risk management.

It announced it has decided to take further steps to include climate change considerations in the Eurosystem’s monetary policy framework. The Eurosystem comprises the ECB and the NCBs of those countries that have adopted the euro.

As part of its changes, it will adjust corporate bond holdings in the Eurosystem’s monetary policy portfolios and its collateral framework, to introduce climate-related disclosure requirements and to enhance its risk management practices.

These measures were designed in accordance with the Eurosystem’s primary objective of maintaining price stability. They aim to better account for climate-related financial risk in the Eurosystem balance sheet and, with reference to our secondary objective, support the green transition of the economy in line with the EU’s climate neutrality objectives.

Furthermore, the measures give incentives to companies and financial institutions to be more transparent about carbon emissions and reduce them.

ECB president Christine Lagarde said, “With these decisions we are turning our commitment to fighting climate change into real action.

“Within our mandate, we are taking further concrete steps to incorporate climate change into our monetary policy operations. And, as part of our evolving climate agenda, there will be more steps to align our activities with the goals of the Paris Agreement.”

Corporate bond holdings

The Eurosystem aims to decarbonise its corporate bond holdings in line with the Paris Agreement. As a result, it is moving towards issuers with better climate performance through the reinvestment of the sizable redemptions expected over the coming years.

This climate performance will be assessed on factors including, lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate-related disclosures.

These measures will apply from October 2022.

Collateral framework

The Eurosystem will limit the share of assets issued by entities with a high carbon footprint that can be pledged as collateral by individual counterparties when borrowing from the Eurosystem.

This new regime aims to reduce climate-related financial risks in Eurosystem credit operations. At first, it will apply limits only to marketable debt instruments issued by companies outside the financial sector.

As the quality of climate-related data improves, additional asset classes might be included in the regime.

The measure will apply before the end of 2024, if technical preconditions are in place. To encourage banks and counterparties to prepare early, it will run tests of the limits regime.

Climate-related disclosure requirements for collateral

The Eurosystem will only accept marketable assets and credit claims from companies and debtors that comply with the Corporate Sustainability Reporting Directive (CSRD) as collateral in Eurosystem credit operations. As the CSRD implementation was delayed, the eligibility criteria will apply from 2026.

This requirement will apply to all companies within the scope of the CSRD and will help improve disclosures and generate better data for financial institutions, investors and civil society.

To encourage stakeholders to align with the changes early, the ECB will run test exercises each year.

However, it stated that a significant proportion of the assets that can be pledged as collateral in Eurosystem credit operations, such as asset-backed securities and covered bonds, do not fall under the CSRD. To ensure a proper assessment of climate-related financial risks for those assets, the Eurosystem supports better and harmonised disclosures of climate-related data for them and acts as a catalyst.

Risk assessment and management

Finally, the Eurosystem will further enhance its risk assessment tools and capabilities to better include climate-related risks. As an example, the ECB analysis has shown that current disclosure standards are not yet satisfactory, despite the progress already achieved by the rating agencies.

To improve external assessment of climate-related risks, the Eurosystem will urge rating agencies to be more transparent about how they incorporate climate risks into their ratings and be more ambitious in the disclosure requirements on climate risks.

There will also be a set of common minimum standards for how national central banks’ in-house credit assessment systems should include climate-related risks in their ratings. These standards will enter into force by the end of 2024.

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