Study finds 70% of ECB corporate holdings damage biodiversity

A new and pioneering study has found that over 70% of corporate bonds held by the European Central Bank (ECB) are potentially associated with high or very high negative impacts on biodiversity.

The study, published by the Institute for Innovation and Public Purpose (IIPP) at University College London, examined nature-related financial risks (NRFR) and impacts in the ECB’s corporate holdings. It also found that over 40% of the €310 billion portfolio is highly dependent upon ecosystem services, and so it is exposed to disruption as a result of ecosystem degradation or collapse.

The study used the Exploring Natural Capital Opportunities, Risks and Exposure (Encore) framework designed by the Natural Capital Finance Alliance to map 86 production processes in 11 sectors with 21 ecosystem services, assigning a ‘materiality rating’ to each of 138 sub-sectors. These ratings were then applied to a simulated investable universe replicating the sectoral breakdown of bonds eligible for ECB corporate asset purchases.

Major negative impacts of the ECB’s holdings which were identified include environmental degradation associated with land use, freshwater use, and pollution. In addition, policy developments concerning habitat loss, pollution and resource use present considerable transition risks for the dependent sectors. The ECB’s exposure to the manufacturing, utilities, real estate, and transportation and storage sectors together account for over 80% of the portfolio’s potential dependencies and impacts.

“The fact that over 70% of the ECB’s corporate sector purchase program is potentially associated with drivers of biodiversity loss suggests it may be undermining the ECB’s secondary mandate to support the broader goals of EU-level economic policy, which includes the ecological transition,” said Katie Kedward, lead author of the report and policy fellow at the IIPP.

Kedward also called for the ECB to align its portfolio with nature as well as with the emissions targets of the Paris Agreement, and recommended that the ECB make nature-related financial disclosures mandatory as a first step.

“To lead by example, the ECB should set a ‘golden standard’ for nature”, Kedward said.

The report comes just months before October’s crucial meeting of the UN Convention on Biological Diversity, in which agreement on the post-2020 global biodiversity framework is expected. “A major aim of the upcoming COP15 biodiversity conference in Kunming is to ensure that finance accounts for the needs of nature,” said Josh Ryan-Collins, IIPP finance and economics head and another author of the report.

“As a major central bank and holder of 20% of euro-denominated corporate bonds, the ECB’s approach to managing nature-related risks within its portfolio will have considerable signalling power to financial markets and could have a material impact on the uptake of prudent risk management practices relating to nature,” he said.

Kedward has also published a Twitter thread containing a comprehensive, illustrated summary of the study and its implications.