With the conclusion of its reinvestments, the greening of the ECB’s Corporate Sector Purchase Programme has come to an end. As the portfolio slowly winds down, the ECB must seek alternative ways to green it.
In July 2021, the European Central Bank (ECB) announced a climate roadmap to green its monetary policy framework. One year later, it presented a more detailed plan. The two flagship measures to green its monetary policy operations were the greening of the collateral framework and the Corporate Sector Purchase Programme (CSPP). In July 2023, just nine months after the ECB started greening the CSPP portfolio, greening efforts came to a premature end. In light of this, the ECB needs to implement alternative approaches to keep greening its CSPP portfolio, as established by its climate roadmap.
What is the CSPP?
The CSPP is a programme that falls under the ECB’s Asset Purchase Programme (APP) umbrella. The APP consists of the purchasing of financial assets by the ECB. By purchasing safe financial assets, the ECB aims to trigger a rebalancing towards riskier financial investments. The APP falls within the category of what has been termed ‘unconventional monetary policy’. Within the CSPP, the ECB buys high-quality corporate bonds.
The CSPP came under severe criticism due to its ‘dirty bias’. Research has shown that carbon-intensive sectors were overrepresented in the purchases within the programme, compared to their actual weight within the economy. This bias was the result of applying market neutrality when conducting purchases, meaning that the ECB purchased bonds in the same proportion as the market distribution, benefitting carbon-intensive sectors, such as carbon-intensive transportation or non-renewable utilities, that were overrepresented in the financial markets. This dirty bias is highly problematic, as it results in favourable funding conditions for the carbon-intensive corporations eligible for the programme.
Greening the CSPP
The ECB decided to act against this dirty bias in order to align its monetary policy operations with the Paris Agreement. To that end, from October 2022 onwards, it started tilting the reinvestments — the reinvestment of the proceeds from maturing bonds into new ones — of the CSPP towards issuers with better climate performance. The ECB uses three metrics to calculate climate performance: the emission intensity of the issuer of the bond, the quality of their disclosures and the ambitiousness of their carbon reduction targets.
The green tilting resulted in a reduction of more than 65% of the carbon intensity (emissions per euro invested) of the reinvestments in the fourth quarter of 2022. Yet, due to the small pace of reinvestments relative to the total portfolio of the CSPP, this process resulted in a very slow impact on the climate metrics of the total portfolio. In 2022, total scope 1 and scope 2 emissions — referring to the direct emissions produced within an organisation and the indirect emissions due to the use of energy — in the CSPP stood at 60 million metric tons of carbon dioxide equivalent, corresponding to 13,351,817 gasoline-powered passenger vehicles driven for one year. These alarming results are computed without consideration for scope 3 emissions, meaning indirect greenhouse gas emissions that take place in activities occurring in the value chain, outside corporate control.
The greening of the CSPP comes to a premature end
This tilting process, even if slow and imperfect, came to a premature end this month. At the June meeting, the Governing Council decided to put an end to its reinvestments under all APP programmes from July onwards. This basically meant that the green tilting of the CSPP reinvestments would no longer take place, bringing to an end one of the flagship measures of the ECB’s green roadmap.
From now on, the CSPP portfolio will be wound down through monthly redemptions — the amount of bonds maturing each month. The total stock of holdings within the CSPP is huge compared to the monthly flow of redemptions, which comes in dribs and drabs. Therefore, it will take a long time until the total portfolio of the CSPP completely unwinds. As of May 2023, the total stock of bonds under the CSPP was €341 billion. Between June 2023 and June 2024, the total amount of bonds reaching maturity will be a total of €34 billion, slightly less than 10% of the total stock. Therefore, the ECB needs to find an alternative approach to green this vast and slowly diminishing portfolio.
The road ahead
There are alternative ways in which the ECB can continue greening its CSPP portfolio while it is unwound. So far, the ECB has been using a ‘flow-based approach’, meaning that the greening has been conducted through the tilting of the flow of monthly reinvestments.
Now that the ECB has ended its reinvestments, it must switch to a ‘stock-based approach’, as executive board member Isabel Schnabel has argued. This would consist of selling dirty bonds within the CSPP portfolio and purchasing green ones. This would not alter the current monetary policy stance, as the total portfolio stock would remain unchanged.
The ECB needs to ramp up its ambitions in greening its CSPP portfolio. First, the alternative ‘stock-based’ tilting must have a higher pace than what we have seen so far, so as to achieve a quicker reduction of the portfolio’s carbon intensity. Second, the ECB should be screening certain economic activities that are not aligned with the Paris Agreement from the portfolio.
In the last monetary dialogue in the European Parliament, ECB president Christine Lagarde was asked by Henrike Hahn on this precise topic. In her response, Lagarde argued that once reinvestments come to an end, the ECB needs to consider alternative ways to green its CSPP to align it with the Paris Agreement.
Notwithstanding this demonstration of willingness, no further actions have been taken on the ECB’s side. Reinvestments have come to an end, and the ECB hasn’t yet announced how it will keep greening the CSPP portfolio. The ECB needs to act now so as to comply with its climate roadmap. As global temperatures keep breaking records, the ambitiousness of the ECB’s climate roadmap needs to expand rather than move backwards — inaction is not an option.