07-03-2023 13:15

ECB’s journey to decarbonise its corporate bonds holdings: an update

The European Central Bank (ECB) has committed to strengthening its efforts to combat climate change. With upcoming monetary policy set to dampen the effect of the bank’s existing flow-based approach to decarbonising its corporate bond holdings, we take a look at the proposed stock-based approach and assess progress so far.
Giant euro sign in front of the ECB tower

Having deemed its existing approach to integrating climate concerns into its bond portfolios as potentially falling short of meeting climate goals, the European Central Bank (ECB) has now signalled the adoption of a more active approach to decarbonisation.

In a recent speech Isabel Schnabel, Member of the Executive Board of the ECB, said the bank’s existing approach to decarbonization, announced last October, was at risk of “losing part of its punch” due to the upcoming quantitative tightening policy’s impact on net asset purchases. Schnabel emphasized the importance of an approach to climate integration that is able to deliver “a stable decarbonisation trajectory in our portfolio irrespective of our monetary policy stance or companies’ individual actions” and announced the potential of implementing a new stock-based approach.

ECB’s current efforts to decarbonize its corporate bond holdings

In October 2022, the ECB launched its strategy to systematically reduce the carbon footprint of its corporate bond portfolio. The plan involved tilting the reinvestment of corporate bonds falling due on its balance sheet towards issuers with higher climate-scoring profiles. This announcement marked a significant step towards fulfilling the ECB’s broader climate agenda, reaching its overarching goal of aligning its bond portfolio with the objectives of the Paris Agreement, and supporting the economy-wide transition in line with EU climate neutrality objectives. Although the ECB has announced intentions to change the way in which the tilt is applied, the climate scoring model remains relevant for the new approach.

What we know about the ECB’s climate scoring

The central aim of the ECB’s climate scoring approach is to assess the risk profile of the bond issuer from a climate perspective. The climate scoring model is based on three sub-scores:

  1. The backward-looking emissions sub-score, reflecting past greenhouse gas emissions of the issuer both on a sectoral peer (best-in-class) and all eligible bond issuer level (best-in-universe).
  1. The forward-looking targets sub-score, evaluating the ambitiousness of issuers’ climate targets towards the Paris Agreement targets.
  1. The climate disclosure sub-score, reflecting the quality, availability and accuracy of the emissions data provided by issuers.

Playing a role in the system-wide embedding of sustainability that we saw during 2022, the move by the ECB will help ensure that calls for greater corporate transparency and action on climate materialise into a real-world impact on funding spreads for those lagging on decarbonisation. The ECB clarified this incentive to corporates in its explanatory guidance accompanying the initial “tilt” announcement, defining the concern for physical and transition risks, and stating that “it is becoming more difficult for companies to get funding if they don’t work on their climate performance.

What does progress look like so far in 2023?

Our analysis of the ECB’s corporate bond holdings under the Corporate Sector Purchase Programme (CSPP) and the Pandemic Emergency Purchase Programme (PEPP) reveals that 52 bonds have been deemed CSPP-eligible in 2023 YTD [1]. Of these 52, 63% were conventional bonds, 23% were green bonds and 13% were sustainability-linked bonds (SLBs).

Source: Nordea, Bloomberg and ECB

Assessing the 23 bonds purchased by the ECB, we observe a greater proportion of conventional and green bonds than seen in the total pool of CSPP-eligible bonds, 65% and 30% respectively. Only one of the bonds in the pool assessed was an SLB. Although the included SLB was tied to climate targets (Scope 1 & 2 emissions, Scope 3 emissions intensity), all of the SLBs not purchased also included targets tied to climate change.

As the ECB’s climate scoring methodology appears to be tied more closely to the issuer than distinct issuance, it may be more insightful to assess the issuers of bonds purchased by the ECB so far in 2023. Although the ECB’s complete climate scoring methodology is not known to us, it is clear that the climate score includes a backward-looking emissions sub-score for issuers. The most reliable point of insight is therefore to assess the available emissions data of relevant issuers. Using Bloomberg’s peer ranking of issuer Scope 1 and 2 emissions intensity [2], we have looked at the relative emissions performance of the eligible pool of unique issuers vs issuers included in the ECB’s portfolio. We have chosen to limit the snapshot to Scope 1 and 2 data that is available from Bloomberg, as the backward-looking emissions sub-score used by the ECB does not include issuer-level Scope 3 data.

Our analysis shows that a greater proportion of the issuers included in the ECB portfolio have been classified as “leading” or as having “below median” emissions intensity than peers. Leading/below median emissions intense issuers account for 47% of unique issuers in the eligible pool of 34 issuers; whereas, 57% of the 14 unique issuers in the ECB portfolio are categorised as having preferable emissions profiles [3].


Source: Nordea, Bloomberg and ECB

This simple measure gives an initial indication that the ECB approach to decarbonisation may have already begun to impact the climate credentials of its corporate bond portfolios. Further, it is worth noting that the backward-looking emissions sub-score, which we have crudely replicated here, is only one of three components of the total climate score.

The inclusion of the 43% of issuers with "above median/lagging” emissions hints at the ECB’s desire to provide support for steady decarbonisation across the whole economy. Indeed, the desire to “at least not initially” divest completely from companies with high climate impact was highlighted in Isabel Schnabel’s recent speech at the International Symposium on Central Bank Independence. She emphasised that reduction incentives should be in place for these companies as they will be key in achieving a green transition.

A potential new chapter ahead in ECB's bond portfolio decarbonization efforts

Starting in March 2023, the ECB will begin reducing its balance sheet by €15bn per month until June, which means that ECB will not be fully reinvesting the maturing debt in its portfolio. Reallocated proceeds will continue to be favoured towards issuers with higher climate scoring profiles.

Returning to Isabel Schnabel’s speech as an ECB Executive board member, she noted that current efforts are “insufficient” to meet ECB’s decarbonization targets in alignment with the Paris Agreement, as the decline of the balance sheet from March onwards will have a diminishing effect. As ECBs main steering tool to decarbonize the bond portfolio is their tilting parameter, the existing flow-based approach should be replaced with a new stock-based approach. In practice the proposed approach would include active reshuffling of the bond portfolio towards higher climate scorers. The stock-based approach may also be applied to other private asset classes in ECB's portfolio, such as covered bonds and asset-backed securities, as well as public sector holdings which account for half of the ECB’s balance sheet.

While it is uncertain how the ECB's new policy will affect the broader picture, it appears that the ECB must make additional changes to its approach towards decarbonisation. After all, ECB representatives have stated that “greening monetary policy requires structural changes to the monetary policy framework rather than adjustments to the reaction function.

[1] Year-to-date: 21 February 2023

[2] A total of 3 issuers did not have a Bloomberg emission intensity score, and hence were excluded from the calculations.

[3] The scoring is based on data reported by issuers (metric tonnes of CO2 equivalent / $M of revenue) against industry peers (Bloomberg Industry Classification Standard Level 4). Leading/below median companies outperform peers' emission intensity performance.


Stella Mylläri
Nordea Sustainable Finance Advisory
David Ray
Nordea Sustainable Finance Advisory

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