Christine Lagarde is expected to make the European Central Bank a pioneer in fighting climate change by slashing its purchases of bonds issued by fossil fuel companies and other heavy carbon emitters, according to a Financial Times poll of economists.
The ECB president has pledged to make tackling climate change a major part of the central bank’s strategic review of its remit and tools, which is due to be completed by the second half of 2021.
Two-thirds of the 33 economists polled by the FT believe the review will result in the ECB deciding to break with its long-held principle of “market neutrality”, which requires it to buy bonds in proportion to the overall market.
Environmental campaigners have criticised the ECB’s €248bn corporate bond purchases for reinforcing the market’s bias in favour of heavy carbon emitters such as oil and gas companies, utilities and airlines because these sectors issue more bonds than most others.
“Market neutrality was always a pretence because it still involved choices of what to buy and what not to buy — so why not make those choices consistent with [policy] preferences?” said Paul Diggle, senior economist at Aberdeen Standard Investments.
Other major central banks have also begun to look at how they can address climate change. The Bank of England plans to conduct climate stress tests on the UK banking sector in June 2021, while Sweden’s central bank recently ditched bonds issued by Australian and Canadian regions from its foreign exchange reserves because their carbon emissions were too high.
The US Federal Reserve recently joined the Network for Greening the Financial System, a consortium of 75 central banks set up to support the Paris climate goals — a further sign of how the issue is rising up the monetary policy agenda. However, no major central bank has applied explicit climate change criteria to its bond purchases.
Ms Lagarde has already signalled that she is in favour of such a move, saying recently that central bankers should “ask themselves” if they are taking “excessive risk” by trusting investors to price environmental issues.
“On balance there is probably a better than even chance that, at some stage, the ECB increasingly discriminates between green and brown issues and issuers, in one form or the other,” said Konstantin Veit, a portfolio manager at Pimco.
However, the idea is likely to be opposed by other members of the ECB’s governing council, such as Jens Weidmann, head of Germany’s central bank, who wrote in the FT last month that “it is not up to us to correct market distortions and political actions or omissions”.
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Stefan Kooths, research director at the Kiel Institute for the World Economy, said he thought the ECB was “very likely” to adapt its monetary policy to meet climate policy targets, even though he thought this was “a bad idea”.
But Mr Diggle said that “achieving climate objectives actually helps deliver on the [ECB’s] price stability objective, given the long-term risks involved in climate change”.
Given how divisive the issue is likely to be, several economists expect the ECB to seek a compromise.
“It will likely reduce its exposure to big [carbon] emitters, without necessarily dropping the market neutrality approach or, if it drops it, justifying it with correcting a market failure,” said Florian Hense, economist at Berenberg.
Gilles Moec, chief economist at Axa, said the ECB could try “carbon targeting” in which it would “gradually reduce the weight of high [carbon] issuers in their portfolio, but also provide incentives for these issuers to actively reduce their own [carbon] footprint”.
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