ECB to limit use of high-carbon assets as collateral

The European Central Bank (ECB) has revealed plans to limit the share of high-carbon assets it will accept as collateral against its lending to banks. It will also consider climate risks when calculating the haircuts applied to corporate bonds when used as collateral – potentially labelling those from polluting companies as more risky and therefore less valuable.

The move features in an update on the ECB’s climate roadmap published on Monday. Climate advocates have welcomed the announcements in principle but say the policies’ true impact will only be clear once further details have been announced.

“The Eurosystem will limit the share of assets issued by entities with a high-carbon footprint that can be pledged as collateral by individual counterparties when borrowing from the Eurosystem,” the ECB says in the document. “Additionally, the Eurosystem will, as of this year, consider climate change risks when reviewing haircuts applied to corporate bonds used as collateral.”.

Daniela Gabor, professor of economics and macrofinance at the University of the West of England, said the new collateral rules are by far the most ambitious in the central banking world.

“The ECB is now in the business of penalising carbon financiers,” she tweeted.

The ECB said the measure is expected to apply before the end of 2024, and that it would announce further details including a timeline in due course.

Lukasz Krebel, an economist at the New Economics Foundation (NEF), said that if implemented effectively the measures could shape market sentiment regarding the  future viability of high-carbon investments.

“The ECB’s move to decarbonise its collateral framework will send a strong signal to markets and increase the costs of investing in carbon-intense infrastructure and activities,” he said.

A report published last year by a group of economists led by NEF found that the ECB’s current collateral framework has a carbon bias, with carbon-intensive companies issuing 59% of the corporate bonds that the ECB accepts as collateral.

The ECB document also sets out further detail on the central bank’s plans to adjust its €344bn corporate bond purchase programme to favour greener companies. It says that from October, the central bank will begin to tilt the reinvestment of maturing bonds towards firms with lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate related disclosures. In doing so, it appears to be following a model similar to that of the Bank of England, which says it is favouring climate-friendly companies via its own corporate bond purchase programme.

Krebel welcomed the ECB’s move to adjust its purchases based on climate performance of the issuers, rather than just on climate-related financial risk. But he stressed the need for ambitious action beyond the measures announced today.

“Faced with the multiple crises of climate breakdown, the cost of living, and high gas prices or “fossilflation”, the ECB must now urgently move towards a proactive, precautionary approach to rapidly shift finance away from harmful activities and towards productive, sustainable investments, in particular by acting on President Lagarde’s support to introduce a targeted green lending programme,” he told Green Central Banking.