The European Central Bank (ECB) has confirmed it is reviewing options to combat climate change as part of its operations, including through its massive EUR2.8 trillion asset-purchase programme (APP), according to a Financial Times article based on an interview with the ECB’s president. This initiative could be positive for eligible green bond issuers if it leads to preferential treatment for bonds financing sustainable activities through improved access to debt capital markets and liquidity, Fitch Ratings says.
According to Christine Lagarde, the ECB’s president, in order to aid combatting climate change the bank launched the strategic review of all its operations, including the APP, earlier this year. Although the implementation of this review was temporarily affected by the coronavirus pandemic, it has recently been restarted. This is in line with our view that the pandemic only slows but does not derail the low-carbon transition. One potential outcome of the review is favourable treatment of eligible green bonds as part of the APP. The ECB already holds about a fifth of green bonds outstanding that are eligible for the corporate sector purchase programme.
Increased purchases of green bonds by the ECB could be positive for eligible issuers as it improves their access to liquidity sources. This could also encourage companies with sustainable activities (defined by the recently published EU taxonomy) to increase issuance of green bonds. Any impact will depend on the green bond selection criteria, the overall scale of such purchases and any effects on the current holdings.
The ECB is also under pressure from environmental campaigners to dispose of the bonds placed by carbon-intensive issuers and increase holdings of greener options. The bank holds around EUR220 billion in the corporate sector purchase programme. Issuers with less environmentally friendly credentials may experience some impact on their access to debt capital markets if the ECB decides to sell such bond holdings quickly. This could be more challenging to implement as the EU is yet to development a taxonomy for so-called “brown” activities.
Although other major central banks are under similar pressure from environmentalists, only the Bank of England has acknowledged – earlier this month – that it would consider including climate change considerations and resetting the benchmark for its purchases of corporate bonds, but only after the coronavirus crisis is over. The US Fed, the largest provider of liquidity with total balance sheet of over USD7 trillion, has not announced any specific environmental targets for its asset purchases.
Source: Fitch Ratings