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19 September 2022

ECB: How are we aiming to decarbonise our corporate bond holdings?


.. we are taking action: we will decarbonise our corporate bond holdings with the aim of putting them on a path aligned with the 1.5 degree goal of the Paris Agreement... we will look at how the companies that issue bonds – known as “issuers” – are working to mitigate their climate impact.

The climate crisis is one of the biggest challenges of our time. It poses severe risks for the economy and it affects price stability, our core mandate as a central bank. This is why we are committed to doing our part in the fight against climate change, within our mandate.

Climate change has an impact on our work in a number of ways, for instance on the climate-related risks of the assets we hold. This is one of the areas where we are taking action: we will decarbonise our corporate bond holdings with the aim of putting them on a path aligned with the 1.5 degree goal of the Paris Agreement. To do that, we will look at how the companies that issue bonds – known as “issuers” – are working to mitigate their climate impact. We will buy more from those that do better in this regard and less from those that do worse.

How does that expose us to climate risks?

In general, when we buy a bond, we accept to take on the risk that this bond might lose value over time. Climate change can be one reason for this: extreme weather events such as wildfires or floods can hit companies’ or their customers’ premises and destroy their warehouses, manufacturing plants or data centres. This is called “physical risk”.

Companies can also suffer from what are often referred to as “transition risks” – the risks emerging from the transition towards a greener economy. Consumers may want to start buying alternative products, or goods and services could become more expensive as governments impose carbon taxes. At some point, legislators might also ban certain carbon-intensive products. And technical innovation can benefit some companies, while others will find it hard to keep up.

All of these changes could severely hit carbon-intensive firms, such as energy producers or transportation companies that rely on fossil fuels, if they don’t adapt to these changes in time. And if they get into financial trouble because of such events, this affects the value of their bonds.

Why do these physical and transition risks matter for the ECB and the national central banks of the countries in the euro area? The Eurosystem holds bonds from many different companies and sectors, and we are therefore exposed to the risks mentioned above. By decarbonising our portfolio, we aim to reduce our exposure to these risks.

Our measures also support the green transition of the economy in line with the EU’s climate neutrality objectives.

ECB



© ECB - European Central Bank


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