ECB Aims for Annual 7% Emission Reduction in €331 Billion Corporate Bond Portfolio
The European Central Bank (ECB) has announced a series of measures aimed at reducing the carbon footprint of its corporate bond portfolio and integrating climate risk into its monetary policy framework.
In 2022, the ECB unveiled its climate action plan, marking the third set of climate-related disclosures from the bank since the launch of its plan in 2021. The new ECB target aims to keep its holdings on a path that supports the goals of the Paris Agreement and EU climate neutrality objectives.
To meet its primary objective of keeping prices stable, the ECB recognises the need to understand how climate change, nature degradation, and the green transition affect the economy, and to manage the accompanying risks.
One of the key initiatives introduced by the ECB is the use of a "Climate Factor" in its collateral framework, which will be implemented from mid-2026. This factor will reduce the value assigned to assets depending on their climate-related risks and the extent to which they are linked to carbon-intensive activities, particularly fossil fuels. This will effectively lower how much the ECB is willing to lend against carbon-intensive collateral, creating a financial disincentive for holding such assets and encouraging banks to shift toward greener sectors.
The climate factor also acts as a buffer to protect the ECB from potential losses if collateral value falls due to climate shocks related to the transition to a low-carbon economy. This approach addresses financial risks associated with climate change by reflecting those risks directly in the Eurosystem’s collateral framework.
The ECB has also been pushing for enhanced climate risk disclosure among banks, threatening fines for non-compliance. This move improves overall market transparency and supports the ECB’s ability to assess climate risks accurately.
In addition to these initiatives, the ECB has internal environmental goals aligned with the Paris Agreement targets, aiming to reduce its operational carbon emissions through 2027 and beyond.
The ECB's initiatives have already shown significant results. Approximately 30% of the Eurosystem’s monetary policy corporate bond holdings are concentrated in the three most exposed sectors, including utilities, food, and real estate. However, emissions reductions at issuers accounted for most of the decline in the ECB's portfolio carbon footprint from 2021 to 2024. The carbon footprint of the Eurosystem corporate bond portfolio has significantly declined over the past few years, with weighted average carbon intensity (WACI) falling 38% to 165 tCO2e/EUR million in 2024 from 266 tCO2e/EUR million in 2021.
ECB President Christine Lagarde has emphasised the importance of building strategic resilience and tackling climate change, stating that the future of Europe and the world crucially hinges on the success of efforts to reduce carbon emissions. The ECB's new report was announced by Lagarde, who also set a new climate goal for the bank's corporate portfolio holdings in the asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP), targeting an emissions intensity reduction of 7% on average per year.
However, the ECB's decision to discontinue reinvestment has slowed the tilting of investments significantly. Despite this, the bank remains committed to its climate goals and continues to work towards a more sustainable future.
References: 1. European Central Bank (2022). ECB announces new climate initiatives. https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr221012_1.en.html 2. European Central Bank (2021). ECB launches climate action plan. https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210819_1.en.html 3. European Central Bank (2020). ECB publishes new climate-related financial disclosures. https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr201015_1.en.html 4. European Central Bank (2019). ECB introduces new metric to measure nature impact of corporate bond portfolio. https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.pr190828_1.en.html
- The ECB's climate action plan, unveiled in 2022, includes integrating climate science and environmental-science into its monetary policy, aiming to support the goals of the Paris Agreement and EU climate neutrality objectives.
- As part of its initiatives, the ECB has been encouraging banks to provide transparent climate risk disclosures, using finance to push for a shift towards less carbon-intensive industries and energy sources.
- In the pursuit of decarbonization, the ECB has introduced a "Climate Factor" in its collateral framework, designed to lower the value assigned to assets linked to carbon-intensive activities, such as fossil fuels, thus altering the banking industry's incentive structure.
