The European Central Bank (ECB) has said it will introduce interim climate targets for its corporate bond portfolios and will not rule out “remedial actions” if portfolios are not on track.
In its second set of climate-related financial disclosures, which cover the central bank’s monetary portfolios as well as the staff pension fund and own funds portfolios, the ECB said its governing council had agreed in May to set interim emissions reduction targets for corporate bond portfolios held in the Asset Purchase Programme and Pandemic Emergency Purchase Programme.
The targets, which will initially be kept internal, will take into account rules set out in the EU benchmark regulation, which governs emissions reduction targets for Climate Transition and Paris-aligned benchmarks.
The ECB holds around €350 billion in corporate bonds bought as part of its asset purchase schemes, although it is now running down these portfolios and has ended reinvestment.
Should “deviations from the desired trajectory” on emissions reductions occur, the ECB said it would assess the possibility of remedial actions, although keeping within its mandate. The bank did not discuss what these actions could entail, but normal practice would mean that divestment could be an option.
According to the ECB’s disclosures for the corporate holdings, there has been a significant decrease in the emissions of its new purchases since the introduction of a climate-aware tilt in 2022. The weighted-average carbon intensity of 2023 purchases was 70 percent lower than the year before the tilt was introduced.
The ECB said that issuer decarbonisation was the main driver of the decrease in its portfolio emissions, although it noted that the use of intensity metrics means this could have been skewed by rising inflation.
There was no widely-used methodology to “robustly” adjust for this, the bank said, adding that it will work with standard setters to seek better metrics for accurately capturing issuer-level decarbonisation.
Around 20 percent of portfolio decarbonisation was attributable to tilting reinvestments, the ECB said. The tilt has also led to significant increases in the proportion of holdings covered by an SBTi-approved target and an increase in green bond holdings.
However, the ECB said it remains underweight on green bonds versus the eligible universe as it is prevented from buying green bonds issued by state-owned companies, which make up a large portion of issuers.
The ECB has expanded the scope of its disclosures to cover sovereign holdings within its two purchase programmes, with the result that emissions disclosures for its monetary portfolios now cover close to €4.5 trillion in assets.
Paris pensions
The disclosures also cover the ECB’s €2 billion staff pension fund, which completed its switch to Paris-aligned benchmarks for its equity investments in 2023 following the adoption of similar benchmarks for corporate bonds the year before.
The adoption of these benchmarks saw the fund almost entirely exit the oil and gas industry, the ECB said, with the allocation declining from 3.9 percent in 2022 to less than 0.1 percent in 2023. In the same period, investments in alternative energy rose from 0.2 percent to 2.6 percent.