The Incorporation of Climate Change Risk in the Eurosystem Monetary Policy Framework and the Decarbonisation of the Corporate Bond Portfolio

As of September 2022, 194 members of the United Nations Framework Convention on Climate Change (UNFCCC) are parties to the agreement. The Paris Agreement’s long-term temperature goal is to keep the rise in mean global temperature to well below 2 °C above pre-industrial levels, and preferably limit the increase to 1.5 °C.

See, among others, Battiston et al. (2021) and ECB (2021b).

See Monasterolo and de Angelis (2020).

See among others, Lagarde (2021), NGFS (2021a) and Campiglio et al. (2018).

See ECB (2021a).

See https://​www.​ecb.​europa.​eu/​stats/​ecb_​statistics/​sustainability-indicators/​html/​index.​en.​html

See Alogoskoufis et al. (2021).

Corporate assets purchased under the Corporate Sector Purchase Programme (CSPP) and the Pandemic Emergency Purchase Programme (PEPP).

See https://​sdgs.​un.​org/​goals

See ICMA (2023).

Haircuts are reductions applied to the value of collateral based on its riskiness (for more details see Chap. “The Eurosystem Collateral Framework and the Measures Introduced in Response to the Pandemic Emergency”).

The CSRD requires all large companies and all companies listed on regulated markets (except listed micro-enterprises) to report the impact of corporate activities on the environment and society, and the audit (assurance) of reported information.

See ECB (2022).

See ECB (2017).

See Mäkinen et al. (2020) and Zaghini (2019).

In practice, the ECB used to deviate from a strict interpretation of market neutrality in several instances (for example for risk management measures), implying that its bond holdings are not strictly proportional to the market capitalisation.

See Schnabel (2021).

See Elderson and Schnabel (2022).

Similar measures have been introduced also by the Bank of England and the Sveriges Riksbank in 2021. For more details, see Bank of England (2021) and Sveriges Riksbank (2023).

Currently, there is no uniform green bond standard within the EU. Consequently, the Eurosystem adopted a stringent identification process for the green bonds that benefit from a preferential treatment. The criteria include, as a starting point: (1) alignment of the green bond framework with a leading market standard, such as the International Capital Markets Association Green Bond Principles or Climate Bonds Initiative; (2) a second-party opinion indicating that adherence to that standard has been reviewed and is confirmed; and (3) a pledge in the bond prospectus to the effect that regular third-party assurance on the use of proceeds is foreseen (e.g. annual verification by an external auditor) until the funds concerned have been fully deployed.

The metrics on which the three sub-scores are based are retrieved from publicly available data as well as other relevant information and methodologies, such as science-based targets. The design of the climate scoring methodology is guided by the requirements for the EU Climate Transition Benchmarks and EU Paris-Aligned Benchmarks under Regulation (EU) 2016/1011 as amended by (EU) 2019/2089.

Scope 1 emissions encompass an entity’s direct emissions, and thus its exposure to rising costs from higher carbon taxes. Scope 2 measures indirect emissions from electricity, heat and steam consumption, and therefore reflects an entity’s exposure to rising input prices. Scope 3 is defined in the GHG Protocol as all the indirect emissions of an entity and its products, excluding those falling into Scope 2, i.e. it includes emissions across the entire value chain.

Issuer-specific Scope 3 data quality is currently not deemed sufficient for the data-dependent decision-making process that will be used for tilting. However, sectoral Scope 3 data were assessed as being sufficiently reliable and were therefore included in the methodology. Using these data ensures that the tilting methodology more accurately reflects the issuer’s overall carbon footprint. The inclusion of sectoral data also makes it possible to incorporate Scope 3 data progressively, thereby minimising any cliff effects that might occur if issuer-specific Scope 3 data were to be introduced at a later stage.

Namely, ABSPP, CBPP3 and CSPP.

See Schnabel (2023).

See TCFD (2021).

See NGFS (2021b).

The Weighted Average Carbon Intensity is computed as the total GHG emissions of each issuer standardised by a measure of company production value, weighted by the investment in the issuers’ bonds as a share of the total portfolio value.

See Elderson and Schnabel (2023).