The European Central Bank will consider ditching a key principle behind its corporate bond purchases to offset the underpricing of climate risk in financial markets, Christine Lagarde has said.

Since the ECB started buying corporate bonds in June 2016 it has adhered to the “market neutrality” principle, which aims to avoid distorting relative pricing of securities by only purchasing them in proportion to the overall eligible market.

However, environmental campaigners accuse the ECB of reinforcing the market’s bias in favour of heavy carbon-emitters such as oil and gas companies, utilities and airlines because these sectors issue more bonds than most others.

The ECB president said in an online video appearance on Wednesday: “In the face of what I call the market failures, it is a question that we have to ask ourselves as to whether market neutrality should be the actual principle that drives our monetary policy portfolio management.”

She told an online event organised by the United Nations Environment Programme Finance Initiative that “more needs to be done because it is probably the case that financial markets by themselves are not actually measuring the risk properly and have not priced it in”.

However, she added that no decision had been taken about the potential changes, which she said would be examined as part of the ECB’s strategy review — which is due to be completed by the middle of next year.

Ms Lagarde called on central bankers to “ask themselves” if they were taking “excessive risk” by trusting markets to correctly price environmental issues.

Some senior ECB governing council members — such as German central bank boss Jens Weidmann — have argued against abandoning the market neutrality principle and said the ECB should leave governments to take the lead on tackling climate change.

Ms Lagarde’s comments were welcomed by environmental campaigners. Stanislas Jourdan, executive director of Positive Money, a Brussels-based lobby group, said: “We obviously welcome this reflection which we have called for since several years ago.”

The ECB owned more than €236bn of corporate bonds at the end of September as part of its €3.4tn asset purchase programme. But Positive Money said in a report published last year that more than 63 per cent of the ECB’s corporate bond portfolio was financing companies in the most carbon-intensive sectors.

Isabel Schnabel, an ECB executive board member, went even further than Ms Lagarde in a speech last month, raising the possibility of “excluding certain bonds” from its asset purchases to avoid financing projects that conflict with the EU’s target to be carbon-neutral by 2050.

Source Financial Times

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