ECB lays out balance sheet run-off, to further favour greener firms

ECB-POLICY-BONDS:ECB lays out balance sheet run-off, will further favour green firms
ECB-POLICY-BONDS:ECB lays out balance sheet run-off, will further favour green firms Copyright Thomson Reuters 2023
Copyright Thomson Reuters 2023
By Reuters
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By Yoruk Bahceli and Virginia Furness

-The European Central Bank will stick to current practice in partial reinvestments of its bond holdings and favour bonds issued by greener companies as it starts running down its 5 trillion euro portfolio from March, it said on Thursday.

The ECB was laying out details after it announced in December it would run bonds off its balance sheet at an average pace of 15 billion euros per month from March through June.

It will do so by not fully reinvesting proceeds from maturing debt bought under its conventional bond purchase programme, the Asset Purchase Programme (APP), from 2015 as the ECB tried to contain deflation risks in the euro zone.

The process is known as quantitative tightening, or QT.

The ECB will allocate proceeds remaining after the rundown proportionally to upcoming maturities across its public and private sector APP holdings, it said in a statement.

For its public sector holdings, it will reinvest in proportion to upcoming redemptions by each country and across governments versus supranational debt, the bank said.


In a bid to decarbonise its assets, the ECB said it will stop buying new bonds issued by private sector entities by March, except where corporate issuers have a strong track environmental track record. It will also continue buying their green bonds, which fund environmentally-friendly projects, in the primary market.

The bank will also skew remaining corporate debt reinvestments "more strongly" towards companies with a better climate performance, enhancing a process it first started in October.

"The ECB have restated their commitment to a stronger tilting of their private sector holdings towards greener issuers," said Jo Richardson, head of portfolio strategy at Anthropocene Fixed Income Institute, a sustainable finance think tank.                

"They have been clear that their primary market interests will depend on the climate performance of issuers. As the largest buyer of corporate bonds, this will impact funding spreads for the high emitters."

ECB President Christine Lagarde said on Thursday the bank would be attentive in order to ensure it doesn't become an "accomplice" to so-called greenwashing, where borrowers exaggerate their green credentials.

It will do so with a "good understanding of the transition plan by the corporates that we eventually reinvest into and a good understanding of the footprint that they have," she told a news conference.

"It will be on the basis of that analysis, our own, and also reliable analysis that will be provided by experts, that we will orientate our portfolio with a stronger tilting than we had so far."

The green commitments nevertheless fell short of recent suggestions by ECB board member Isabel Schnabel, who said relying on reinvestments would not be enough to meet the ECB's climate ambitions.

Her suggestions included actively selling bonds of companies with weaker green credentials and replacing them with greener ones, increasing the ECB's holdings of bonds issued by supranational organisations, who rely more on green funding, and reshuffling government bond holdings towards green bonds.

Sylvain Broyer, Chief EMEA Economist at S&P Global Ratings said the ECB would be reinvesting roughly 2.4 billion euros ($2.6 billion) into the corporate debt market per month, a tiny amount relative to its holdings of over 300 billion euros.

"Even if you reinvest all of this money in green bonds, the greening of the corporate bond portfolio is still not made," he said.

By raising longer-term borrowing costs, the winding-down of the bond portfolio should tighten financial conditions, making it more expensive for firms and governments to borrow. The ECB has also been raising interest rates at a record pace, including another 50 basis point hike on Thursday.

($1 = 0.9145 euros)

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