ECB president Christine Lagarde announced Wednesday evening that he would consider removing the neutral principles that central banks use to guide the purchase of corporate bonds.
The reason for this heart change is because the principle of neutrality does not take into account climate change and environmental risks in the bond buying process. The currently in place approach has been around since 2016, aiming to avoid misrepresentation of securities prices simply by purchasing proportionally to the entire eligible market.
However, this approach is met by resistance from sustainability advocates who say that the purchasing principles for ECB bonds are biased towards high carbon and environmentally integrated companies. These businesses are usually found in sectors such as oil, gas, utilities, and airlines, and are overrepresented in the ECB bond portfolio.
President Lagarde appears to be sharing his mindset in recent online videos, fortunately for sustainable businesses. “The question is that in the face of what I call a market failure, I have to ask myself whether market neutrality is a practical principle that encourages financial policy portfolio management.”
“I’m not judging the fact that it should no longer be, but that guarantees the question, which is what we’re trying to do as part of our strategic review.”
She told viewers of the event organized by the UN Environment Programme Finance Initiative that “more needs to be done as the financial markets themselves may not actually measure risk properly and may not be priced properly.”
Lagarde also said that central bankers would have to ask themselves questions about whether they are taking excessive risks simply by trusting mechanisms that are not based on the massive risks there.”
She also noted that no formal decisions have been made as to what will happen in the earthquake changes at the European central bank TAC. However, she also said that potential changes will be discussed as part of the ECB strategy review.
As part of the 3.4 billion euro asset purchase program, the ECB currently owns more than 236 billion euros of corporate bonds. However, positive money reported that over 63% of bank bonds funded the carbon-intensive sector last year.
Furthermore, if Lagarde wants to make her proposal come true, she must face opposition from council members. In fact, German central bank boss Jens Weidmann has argued in support of neutrality, saying the ECB should leave the national government to make decisions about its own climate change policies.
But her considerations are supported. Not only does environmental activists praise Lagarde’s proposal, Stanislas Jordan, executive director of Positive Money, said:
Similarly, ECB Executive Committee member Isabel Schnabel went further in a speech given last month, suggesting that central banks should exclude certain bonds entirely to avoid funding for businesses that conflict with the EU’s 2050 carbon neutrality target.
