# ECB can cut carbon footprint by shedding bonds of biggest polluters
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-01-16
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: ECB Green Ambitions: Cutting Carbon Footprint of Corporate
Meta Description: Research shows selling just 50 billion euros of polluting companies' debt could reduce carbon footprint by 87%, but analysts warn of market distortions.
URL: https://financedigest.com/ecb-can-cut-carbon-footprint-by-shedding-bonds-of-biggest-pollutershtml

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By Virginia Furness and Francesco Canepa

LONDON (Reuters) -The European Central Bank could radically cut the carbon footprint of its corporate bond portfolio by selling just 50 billion euros ($54.30 billion) of polluting companies’ debt, research shows, but analysts say this would risk big market distortions.

The ECB’s green ambitions are in the spotlight after board member Isabel Schnabel this week said the bank must step up efforts to become more climate friendly.

But other [central bank](https://www.financedigest.com/governments-and-central-banks-risk-inflation-bank-of-england-has-done-its-bit-now-the-politicians-turn.html "Governments and central banks risk inflation, Bank of England has done its bit, now the politicians’ turn") policymakers, including from the ECB and U.S. Federal Reserve, have said tackling [climate change is for governments not central bankers](https://www.financedigest.com/inflation-fighting-central-bankers-air-climate-role-doubts.html "Inflation fighting central bankers air climate role doubts").

And analysts fear such action by the [ECB could go against central banks’](https://www.financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-fire.html "Big ECB hike adds fuel to the banking sector fire") mission of maintaining market stability.

Schnabel, head of the ECB’s market operations, said the ECB was meant to tilt its corporate bond holdings towards greener [assets](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way") via new purchases but new bond buys have been stopped and reinvestment will soon be wound down as part of its inflation fight.

Schnabel said the ECB needed now to consider a reshuffling of its 345-billion-euro [corporate bond](https://www.financedigest.com/green-bonds-are-set-to-drive-corporate-esg-debt-out-of-slump-in-2023-barclays.html "Green bonds are set to drive corporate ESG debt out of slump in 2023 -Barclays") portfolio towards greener issuers.

She [faced immediate pushback from ECB](https://www.financedigest.com/analysis-euros-20-year-low-leaves-ecb-facing-costly-choices.html "Analysis-Euro’s 20-year low leaves ECB facing costly choices") policymaker Pierre Wunsch, who said it was for governments to fight climate change. But her comments got [market watchers running](https://www.financedigest.com/organic-expansion-to-run-through-the-iv-equipment-market.html "Organic Expansion To Run Through The IV Equipment Market") the numbers.

Analysis from sustainable finance think tank Anthropocene Fixed Income Institute (AFII) showed the ECB could cut the carbon footprint associated with its corporate bond [holdings by 87% if it sold just 48.3 billion euros of debt from the 25 top](https://www.financedigest.com/5-top-tips-when-holding-a-crisis-press-conference.html "5 Top Tips When Holding a Crisis Press Conference") polluters.

These [included oil](https://www.financedigest.com/ing-toughens-oil-and-gas-policy-to-include-trade-finance-midstream.html "ING toughens oil and gas policy to include trade finance, midstream") and gas companies such as Shell, TotalEnergies, Repsol and BP.

This is an extremely high concentration of carbon in a few names,” said AFII founder Ulf Erlandsson, adding the total emissions they [account for is substantial in the context of annual global CO2 emissions of around](https://www.financedigest.com/5-common-mistakes-around-accounts-payable-automation.html "5 Common Mistakes Around Accounts Payable Automation") 30-40 giga tonnes.

[Financial institutions worldwide are looking to reduce the climate-damaging greenhouse gases emitted into the atmosphere by the companies](https://www.financedigest.com/disconnected-customers-are-one-of-the-biggest-problems-facing-financial-companies.html "Disconnected customers are one of the biggest problems facing financial companies") they lend to, as part of efforts to cap global warming, yet central banks have been more cautious.

U.S. Fed chair Jerome Powell has said the bank’s regulatory powers give it a narrow role to ensure financial institutions “appropriately manage” the risks they [face from climate change](https://www.financedigest.com/the-changing-face-of-peer-to-peer.html "THE CHANGING FACE OF PEER-TO-PEER"). “We are not, and will not be, a ‘climate policymaker'”, he said.

But [ECB President Christine Lagarde](https://www.financedigest.com/ecb-needs-to-keep-interest-rates-sustainably-high-to-combat-inflation-lagarde.html "ECB needs to keep interest rates ‘sustainably high’ to combat inflation – Lagarde") has made greening monetary policy one of her objectives. The Bank of England set out [plans to “green”](https://www.financedigest.com/eu-announces-plans-to-lead-green-industrial-revolution.html "EU announces plans to lead green industrial revolution") its corporate bond portfolio in 2021 but these were soon overtaken by a decision to unwind all holdings as part of its fight against inflation.

HURDLES

While calculating the carbon footprint of the ECB’s portfolio is challenging, AFII estimates it to be around 438 million tonnes of CO2 annually – more than Italy or France emitted in 2017, based on [European Union](https://www.financedigest.com/explainer-why-malaysia-is-considering-a-ban-on-palm-oil-exports-to-the-european-union.html "Explainer-Why Malaysia is considering a ban on palm oil exports to the European Union") data.

The ECB does not disclose how much it owns of any individual bond so AFII’s [estimate is based on the assumption that it holds](https://www.financedigest.com/ibm-beats-first-quarter-profit-estimates-signals-demand-holding-up.html "IBM beats first-quarter profit estimates, signals demand holding up") an average of 27% of each of the outstanding bond of Corporate Sector Purchase Programme- eligible issuers.

Some analysts [say that any ECB selling of so-called “brown bonds”](https://www.financedigest.com/stanchart-ceo-says-at1-bond-wipeout-has-profound-impact.html "StanChart CEO says AT1 bond wipeout has profound impact") — those issued by highly polluting companies in sectors like utilities and energy — would distort the market.

Sylvain Broyer, chief economist for Europe, the Middle East and Africa at S&P Global Ratings, said it would lead to “massive repricing” of corporate debt and go against the ECB’s [focus of maintaining market stability](https://www.financedigest.com/fed-in-spotlight-with-us-focus-on-stability-first-republic.html "Fed in spotlight with US focus on stability, First Republic").

Another objection is that selling the bonds would penalise high-emitting companies that are looking to become more environmentally friendly and [need financial backing](https://www.financedigest.com/if-the-nation-backs-fintech-we-need-to-address-a-few-things.html "If the nation backs FinTech, we need to address a few things") to do so.

The ECB is already addressing that problem by giving companies climate scores that are based not just on their [current](https://www.financedigest.com/what-flatsharing-is-a-financial-gamechanger-in-the-current-climate.html "Why flatsharing is a financial gamechanger in the current climate") performance but also on their goals and climate disclosures.

The [ECB uses those scores to steer its bond](https://www.financedigest.com/how-will-the-ecb-contain-fragmentation-risk-in-euro-area-bond-markets.html "How will the ECB contain fragmentation risk in euro area bond markets?") purchases towards greener issuers.

Larissa de Barros Fritz, fixed income strategist at ABN Amro, estimated any move by the ECB to sell brown to buy green bonds could mean spread [widening](https://www.financedigest.com/high-inflation-recession-risk-widen-ecb-dilemma.html "High inflation, recession risk widen ECB dilemma") of 7-15 basis points for bonds that the ECB would no longer buy.

For Trisha Taneja, [global head](https://www.financedigest.com/new-york-catches-up-with-london-to-head-citys-global-centres-survey.html "New York catches up with London to head City’s global centres survey") of ESG for the origination and advisory division at Deutsche Bank, excluding the most polluting companies altogether would also make the ECB’s portfolio too unbalanced.

“\[This\] is why… the approach should be in a [tilt towards](https://www.financedigest.com/the-antiobesity-drugs-market-to-tilt-towards-digitization.html "The Antiobesity Drugs Market to tilt towards digitization") credible transition strategy, rather than towards current climate performance,” she said.

($1 = 0.9209 euros)

(Editing by Simon Jessop and Jane Merriman)


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