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ECB ahead of “green” criteria for their bond purchases

D.he European Central Bank (ECB) could soon also take climate risks into account in its monetary policy bond purchases. A move in this direction by Bundesbank President Jens Weidmann on Wednesday did not seem to have come by chance at this point in time and shows the direction in which it could go.

As we learned, the central bank has to make specific decisions. The Governing Council, the supreme body of the central bank, will meet in the week but one from June 18 to 20 for a retreat. It is said that the topic of “green finance” should be discussed there in such a way that there is a consensus. For the central bank’s non-monetary policy portfolios, the Governing Council had already decided on “green principles” in February. Now it is a question of the more sensitive issue of monetary policy bond purchases, which could conflict with the primary objective of the ECB, price stability.

Take adequate account of climate risks

In a speech on Wednesday, Weidmann said that if the rating agencies did not take climate risks into account in their bond ratings quickly enough, the central bank could limit the maturities or the quantity of bonds from certain sectors or issuers. In other words: The ECB could no longer buy “green” bonds, but fewer “brown” ones – more precisely: those that have higher financial risks from climate change. Up until now, Weidmann had described it as the task of the rating agencies to take climate risks into account when rating bonds. In addition, the Eurosystem central banks could consider buying bonds or accepting them as collateral only if the issuers meet certain climate-related reporting obligations. In addition, the central banks could examine whether they should only accept ratings that adequately take climate-related financial risks into account.

It was heard from the Governing Council that very far-reaching demands for green bond purchases had already met with skepticism at the Council’s previous seminar on this topic. And not only among the usual “hawks”, the proponents of a tighter monetary policy, but also among the “pigeons”, that is, the proponents of a looser monetary policy. The expectations have therefore already decreased somewhat. Perhaps that also allows Weidmann to act less fundamentally against efforts in this direction.

Small praise from Greenpeace

At an event, ECB Executive Board member Isabel Schnabel supported the criticism from Greenpeace and other environmental protection organizations that according to the previous selection criteria of the ECB, such as the volume of outstanding bonds, in practice large companies with high CO2 emissions were disproportionately taken into account compared to their share in value creation or employment. “We buy a particularly large number of sectors with a high emission intensity,” Schnabel had said. These criteria are now obviously being wrestled with.

In any case, Greenpeace reacted positively to Weidmann’s initiative: The Bundesbank is moving, albeit “in small steps,” said Greenpeace finance expert Mauricio Vargas: “For the first time, Mr. Weidmann named tangible implications of a consistent interpretation in his presentation on the effects of climate risks he has so far refused. “

While some observers said that Weidmann had “buckled”, the Bundesbank replied that Weidmann had “developed” his position, not “changed” it. ECB Executive Board member Isabel Schnabel recently said: “A lot has happened in the last few months – many have moved, including Mr. Weidmann.”

Even now, not all bonds are being bought

Economist Volker Wieland said that considering climate risks in the central bank’s risk management is at least less sensitive from a monetary policy point of view than the targeted purchase of green bonds: “It seems to me quite legitimate that the ECB also takes climate risks for bonds into account in its risk management,” said Wieland .

The ECB also operates a selection of assets from a risk perspective, for example it does not buy shares and is already excluding many corporate bonds from a risk perspective, said the economics professor. This is something completely different than if the ECB would specifically buy green bonds, said Wieland. “The big question is: How does the ECB know which bonds should be excluded because of high climate risks? If the rating agencies cannot say that, where should the ECB get this knowledge from? “

Wieland said that if the central bank wanted to do this, it should be easier to identify financial risks from climate policy, such as price changes for fossil fuels, than the more long-term physical risks from climate change itself.

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