How Green is Our Balance Sheet?

Members of the European Central Bank’s (ECB) executive board, Frank Elderson and Isabel Schnabel, say the ECB’s first comprehensive disclosures of its investment portfolio’s carbon footprint show that the bank’s strategy is “bearing fruit” on the path to decarbonisation.

However, in the same blog post they say that the results also show that the ECB “may need to be more ambitious” in areas such as the collateral framework, lending operations and public sector bonds, as monetary policy tightening presents the bank with “fewer opportunities” to tilt the climate profile of its balance sheet through reinvestment alone.

The scope of the disclosures discussed in the blog How Green Is Our Balance Sheet? covers the ECB’s non-monetary policy portfolios (NMPPs), including its green funds portfolio and its staff pension fund, as well as corporate securities holdings under the corporate sector purchase programme (CSPP) and the pandemic emergency purchase programme (PEPP).

In the blog post, Schnabel and Elderson highlight findings that since the ECB began tilting its corporate holdings, investments in the fourth quarter of 2022 were 65% less carbon intensive than the previous three quarters. Additionally, they draw attention to the fact that the ECB has halved the total carbon emissions of the staff pension fund since 2019.

And while they note that CSPP/PEPP portfolio’s overall carbon intensity has reduced by 26% between 2018-2022, the blog also presents findings showing that the portfolios’ total carbon emissions nearly doubled over the same period, from 37 megatonnes of CO₂ emitted to 60 megatonnes.

Reflecting on the exercise, Schnabel and Elderson argue that knowledge gained from disclosures can be used for a “check-up” on the pace of progress and readjust the course if necessary to keep the bank on track with climate commitments. Adding that, since climate change affects central banks’ core mandate of price stability, the ECB must continuously rethink its climate-related measures to “strengthen incentives” for companies to reduce emissions.

The authors call for “proactive and swift action” to improve climate transparency and emphasise the ECB’s ongoing commitment to improve the quality and scope of its disclosures.

This enhanced transparency will be used to steer the reduction of emissions in line with the Paris climate agreement, according to the authors. It will also, they say, set an example for other institutions, improve the realisation of green capital markets in Europe and increase overall investor confidence.

Regarding next steps, the report emphasises the importance of interim disclosures and targets to reach net zero by 2050, as well as the need for joint efforts at European and global levels for mandatory rules on climate disclosures.