Sweden’s central bank, the Riksbank, will weaken so-called “market neutrality” in its asset purchases, according to an executive board decision. From January 1, 2021, the bank will “only offer to purchase bonds issued by companies deemed to comply with international sustainability standards and norms”.
In commentary accompanying the decision, the board identified the UN Global Compact as one example of these “standards and norms” and framed the move in terms of risk, saying “it is more risky to buy bonds issued by companies that are in breach of universal norm-based principles”.
However, the Riksbank’s move is not a clear break from market neutrality, and the commentary contains many caveats. The bank’s purchasing decisions will be made according to three principles: equality, objectivity and proportionality. This means that similar companies will be treated equally, that decisions will be based on evidence, and that decisions will be “in reasonable proportion to the negative consequences this choice may have for the company.” Addressing market neutrality directly, the bank said that “the choice of corporate bonds based on sustainability considerations shall be made with the aim of avoiding distorting effects on the market for these assets”.
Essentially, the Riksbank has introduced climate- and sustainability-related considerations into its purchasing decisions, while maintaining the option to ignore those considerations if they think they might have a market effect. Since the very purpose of making sustainability decisions is to have a market effect (i.e., away from carbon and towards alternatives), there is clearly some element of contradiction here. However, the Riksbank deserves credit for leading on this important issue, however weakly, and will be watched by other central banks.
The very idea of market neutrality itself is dubious, with many central bank actions intended to influence the market in some way. Chiara Senni and Pierre Monnin from the Council on Economic Policies have identified existing non-neutrality in transmission channels, private and public sector asset allocations, private sector asset purchases and index choices.
No decision is “neutral”, they say:“All along the monetary policy implementation process, central banks make choices which favour some assets more than others and thus shape relative prices, as well as relative funding conditions for firms. Central banks may have compelling reasons for these choices, but they must not hide behind a veil of alleged market neutrality to avoid scrutiny and a discussion of alternative proposals.”
The Bank of England has also made clear its intention to introduce climate and sustainability criteria into its asset purchasing programme, but has been waiting for a necessary update of its mandate from Chancellor Rishi Sunak and HM Treasury. This delay from the Treasury weakens the UK’s climate reputation and position as it prepares to host the crucial COP26 in its first global leadership role since Brexit.
This page was last updated April 23, 2021
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