Bundesbank president defends high-emission ECB asset purchases

Bundesbank President Jens Weidmann came out strongly against the exclusion of high carbon companies from the European Central Bank’s (ECB’s) asset purchases at the prestigious European Banking Congress, held in Frankfurt last month.

“I am very critical of suggestions that monetary policy should be used to actively pursue climate policy goals,” said Weidmann. “We were not granted independence to make the decisions that politicians are unwilling to make themselves”.

Weidmann’s criticisms stood out in a speech otherwise strongly supportive of climate action by the ECB. Climate change threatens to return us to the stone age, Weidmann warned, calling it “a monstrosity”. The market flaw is negative externality, he charged, in a powerful argument for carbon pricing.

“Clearly, it is also up to central banks to do their part. And this certainly goes beyond reducing their carbon footprint as institutions,” he said. “In my view, the Eurosystem should consider only purchasing securities or accepting them as collateral for monetary policy purposes if their issuers meet certain climate-related reporting obligations.” 

But Weidmann drew the line at market neutrality in ECB asset purchases – the question of whether the ECB should mirror the composition of the bond market in its asset purchases, or instead favour sustainable investments (as Sweden’s Riksbank will from January). Abandoning market neutrality to favour one kind of investment over another is expecting the ECB to act where governments have failed, Weidmann said, warning of potential conflict with the primary mandate of price stability and of distributional implications requiring “strong democratic legitimacy”.

Placing climate change as a political issue unfairly thrust onto central bankers, he warned of mission creep and suggested that if climate were to influence asset purchases “central banks will soon face calls to correct market outcomes in other areas as well”. In Weidmann’s view, market neutrality is an issue of central bank independence from politicians who won’t do their jobs.

Weidmann’s position on market neutrality contrasts starkly with that of ECB executive board member Isabel Schnabel and ECB President Christine Legarde, both of whom have recently expressed openness to questioning market neutrality and favouring green investment.

Legarde was explicit: “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. I’m not passing judgment on the fact that it should no longer be so, but it warrants the question and this is something we are going to do as part of our strategy review.”

The review Legarde refers to is the ECB’s strategic review of its monetary policy framework – the first since 2003 and also the first to include climate change as a work stream. Launched in January this year, the review began with an extensive listening exercise – and then was suspended due to the covid19 pandemic. Relaunched in September, the process is expected to take another year, and the debate is just beginning. The views of Weidmann and Schnabel and Legarde should be seen in the context of that debate.

Also worth noting is Weidmann’s defense of market neutrality as necessary to prevent the distortion of market outcomes. “This is why we have to check whether we have unintentionally allowed bias to creep into our securities portfolio, compared to the universe of eligible bonds,” he explains. In other words, Weidmann is strongly for ECB climate action, aggressive carbon pricing, full climate risk disclosure, and the full inclusion of climate risk in asset purchasing decisions. Influenced by concerns about ECB independence, he is against any weakening of market neutrality, but he is also willing – even eager – to look for bias in the ECB’s €250 billion portfolio.

And bias there is: A report published in October by the New Economics Foundation, Greenpeace and three British universities finds that, far from preventing the distortion of market outcomes, when compared to employment and Gross Value Added (GVA), ECB asset purchases are heavily biased towards sectors with a high contribution to greenhouse gas emissions (GHGs). “For example, ‘Electricity, gas and steam and air conditioning supply’ and ‘Manufacturing’ are two of the highest polluting sectors in the economy, accounting for 54.8% of euro area GHG emissions. Collectively these sectors contribute only 13.8% to euro area employment and just 19% to euro area GVA, yet account for 58.9% of the outstanding amount in the ECB list.” This deep pro-emissions bias has its roots in the ECB’s collateral framework – the broad and highly complicated rule book of what can or cannot be purchased under quantitative easing or pledged as collateral in refinancing operations.

The purity of Jens Weidmann’s conception of market neutrality lies in the assumption that bond issuance, subject to qualifying conditions, should be the only determining factor in ECB asset purchases. But instead of preventing the distortion of market outcomes, this perspective enhances them, skewing the wider economic and emissions context within which the bond market takes place.

Weidmann identifies negative externality as the prime market flaw behind climate change, but fails to recognise that the bond market also pushes its costs on to others. While the market may be neutral, it is clear that the bias and complexity of the ECB’s collateral framework is not.