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ECB takes climate protection seriously

D.he European Central Bank (ECB) wants to accept “green” bonds, the interest coupons of which are linked to sustainability goals, as collateral for its monetary policy credit transactions. If these papers meet the other eligibility criteria for bond purchases, they could also be acquired within the framework of the crisis program PEPP (“Pandemic Emergency Purchase Program”) and the older bond purchase program APP (“Asset Purchase Program”), the ECB announced on Tuesday in Frankfurt. The new rules should apply from January.

ECB President Christine Lagarde speaks on the short message service Twitter of a “step in the right direction”. Climate change is everyone’s responsibility. “As I said earlier, I want to explore all available avenues to combat climate change,” writes Lagarde. ECB Executive Board member Isabel Schnabel tweeted: “A journey of thousands of miles has to start with a single step.”

No “green QE” yet

More observers rated this as a signal that Lagarde wanted to take their efforts seriously to incorporate aspects of climate protection more strongly into the work of the central bank. However, it should be clearly separated from the possibility of operating a “green QE”, that is, aligning bond purchases specifically with ecological criteria and selecting the bonds to be bought according to sustainability criteria. That’s not what this step is about. The central bank has already been buying “green” bonds that are constructed differently and in some cases even select bonds based on sustainability criteria – the latter, however, on a smaller scale and primarily for its own pension funds. In this step, it is now a matter of determining the “central bank eligibility” of certain bonds, namely those whose coupon is linked to the achievement of certain sustainability goals. “It is routine that new issues and types are constantly checked to see whether they are eligible for a central bank”, it was said in central bank circles.

Promotion of project finance

Christoph Kutt, bond specialist at DZ Bank, said: “The ECB wants to promote sustainability bonds by allowing them as collateral for loans or even including them in the APP or PEPP purchase programs.” This achieves higher market liquidity for this type of bond and Perhaps this would encourage emissions activity and extensive sustainability projects. In this case, it is about bonds whose coupon is linked to a sustainability project. “Let’s say that company XY builds wind farms, refinances it with such a bond and the coupon depends on the return on the wind farm.” The coupon is therefore variable. “Otherwise, the company might have to finance this wind farm with a bond with a fixed coupon, which would be ECB-capable and therefore more liquid.” The problem for the company is that the bond with the fixed coupon always pays out, for example, 5 percent, the wind farm but have a year in which he only earns 4 percent. The company would then have to close the gap of 1 percent. “By accepting or buying such sustainability bonds with variable coupons as collateral from January onwards, the ECB makes it easier to finance such projects, as it offers itself as a buyer, and perhaps creates a larger market for these bonds from standard fixed income investors due to the variable coupon, less likely to be bought. “

Decision in the Governing Council not controversial

Lagarde had recently emphasized several times that she believed it would be right if the central bank would buy more “green” corporate bonds and not just wait until this sector of the financial market grows so strongly on its own that the ECB automatically becomes more “green”. Get bonds in their books. She had seen it differently for government bonds, the central bank simply bought government bonds and it was up to the states to do something to protect the climate. It is difficult to differentiate between bonds from “greener” and “less green” countries. It was therefore speculated whether the ECB will sooner or later set up its own segment “green bonds” for the purchase of corporate bonds.

However, unlike the decision now, these fundamental questions are not undisputed in the Governing Council. Bundesbank President Jens Weidmann, for example, had always emphasized that it was important to do a lot for climate protection. The consideration of risks from climate change – there are both physical (“The company is too close to the sea”) and so-called transitory risks through regulation (“The state could ban internal combustion engines at some point”) – is more the task of the rating agencies. This is considered a critical position towards “green QE” in the narrower sense.

Many institutions recently issued new “green” bonds, including the federal government with some success. The state of Baden-Württemberg decided on Tuesday to issue the first “Green Bond Baden-Württemberg” in spring 2021. The bond is to be issued annually and each has a volume of at least 300 million euros. If there are more suitable projects, the volume could also be larger. Possible projects are energy efficiency programs for buildings, the expansion of local public transport and measures to protect resources. “For years we have been focusing on investments in the environment and climate protection. With our Green Bond we give the capital market the opportunity to participate directly, ”said Finance Minister Edith Sitzmann.

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