Enhancing climate resilience of monetary policy implementation in the euro area

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PDF ISBN 978-92-899-6062-5, ISSN 1725-6534, doi:10.2866/249583, QB-AQ-23-009-EN-N

[1] See ECB (2023), Climate-related policies in the Eurosystem/ECB staff macroeconomic projections for the euro area and the macroeconomic impact of green fiscal measures.”Economic Bulletin, Issue 1.

[2] See ECB presents action plan to include climate change considerations in its monetary policy strategy,” ECB press release, 8 July 2021.

[3] See ECB takes further steps to incorporate climate change into its monetary policy operations”, ECB press release, 4 July 2022.

[4] The objectives and tasks of Eurosystem are set out in Article 127 of the Treaty on the Functioning of the European Union [2012/C 326/01].

[5] In other words, the adoption by the Eurosystem of measures designed to circumscribe the risk of financial losses forms part of the definition and implementation of monetary policy, as also reflected in Article 18.1 of the Statute of the European System of Central Banks and the European Central Bank, pursuant to which the Eurosystem may conduct credit operations with lending being based on adequate collateral.”

[6] Outside the scope of this paper, it is worth recalling that in July 2021 the ECB also announced that the Eurosystem will expand its analytical capacity in macroeconomic modelling, statistics and monetary policy on climate change.

[7] Specifically, the objectives set out in Article 3 of the Treaty on European Union, which include the sustainable development of Europe” and a high level of protection and improvement of the quality of the environment”.

[8] Unless stated otherwise climate change (financial) risks can be attributed to transition and physical risk.

[9] For further information, see thedetailed roadmap of climate change-related actions.

[10] See the Joint ESAs-ECB Statement on disclosure on climate change for structured finance products.

[11] SeeECB takes further steps to incorporate climate change into its monetary policy operations”, (ECB press release, 4 July 2022).

[12] The ECB is leading by example in this area by committing to provide additional disclosures of its own portfolios. See ECB starts disclosing climate impact of portfolios on road to Paris-alignment”, (ECB press release, 23 March 2023).

[13] The Greenhouse Gas Protocol distinguishes between direct greenhouse gas emissions of companies from owned or controlled sources (scope 1), indirect emissions from purchased electricity, steam, heating or cooling (scope 2) and all other indirect emissions, including those occurring along the corporate value chain, either upstream or downstream (scope 3). See the Greenhouse Gas Protocolfor further information.

[14] See Climate-related data successfully procured”(Deutsche Bundesbank press release, 9 March 2022).

[15] For further information, see theJoint ESAs-ECB Statement on disclosure on climate change for structured finance products.

[16] See ECB (2023), Results of the 2022 climate risk stress test of the Eurosystem balance sheet”, Economic Bulletin, Issue 2.

[17]See Breitenstein et. Al. (2022).

[18] See Koerding and Resch, Economic Bulletin, Issue 6, ECB, 2022

[19] See more about the Eurosystem collateral frameworkhere.

[20] See Adler, et. Al. (2022).

[21] The Eurosystem currently applies limits on the mobilisation of unsecured debt instruments issued by a credit institution or by closely linked entities.

[22] With regard to sustainability-linked bonds, only debt instruments with sustainability performance targets linked to climate change and/or environmental goals/objectives are eligible as Eurosystem collateral. For further information see the FAQ on sustainability-linked bonds.

[23] This universe excludes debt instruments issued/settled in Central Securities Depositories (CSDs) located outside of the euro area and debt instruments issued in ineligible currencies (i.e. other than the euro, pound sterling, yen or US dollars).

[24] This paper simplifies and calls CSPP to both cover corporate bond holdings under APP and PEPP whereas strictly speaking CSPP entails only the APP part.

[25] In broad terms, the CSPP-eligible universe consists of investment-grade euro-denominated bonds and commercial paper issued by non-bank corporations (i.e. non-financial corporations and insurance corporations) established in the euro area and includes over €1 trillion worth of securities. The size of the CSPP vs the eligible universe varies over time, depending on the growth dynamics of each component. When the CSPP was established in 2016 its eligibility criteria were defined as broad” for it to fulfil its objectives.

[26] Specific details of the dimensions can be found in the FAQ section on the ECB website.

[27] See Question 8 of the FAQ on the ECB website

[28] For further details, see the ECB Press releaseon this topic.

[29] For further details, see the reports of climate-related financial disclosures of the Eurosystem’s corporate sector holdings for monetary policy purposes. It considers the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the Partnership for Carbon Accounting Financials, and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which all provide widely used and accepted standards for sustainability reporting.

[30] For an overview of the functioning of central bank asset purchases see ”The yield curve and monetary policy”, Speech by Philip R. Lane, Member of the Executive Board of the ECB, 25 November 2019.

[31] The underlying assumption is that while expectations may have played a role in terms of yield compression over the course of the programme, all effects should have materialised after the final purchase has been implemented. The choice of the review period is consistent with the approach of D’Amico and King, i.e. to use the difference in price between announcement and conclusion of a programme to measure local effects and clean for expectations of future purchases.

The use of the full period of purchases is in line with D’Amico and King (2013), Flow and stock effect of large-scale treasury purchases: Evidence on the importance of local supply”, Journal of Financial Economics, May. Analyses of the CSPP have often used shorter time frames, either because they focus on announcement effects, or because at the time of writing the programme was still in the net purchase phase. See De Santis, Geis, Juskaite and Vaz Cruz,ECB (2018),The impact of the corporate sector purchase programme on corporate bond markets and the financing of euro area non-financial corporations”, Economic bulletin, Issue 3..

[32]The stylised example used here is based on a 30% reduction in the overall emissions intensity of the CSPP portfolio. Company weights are based on an indicator which comprises backward and forward-looking emissions intensity, as well as the quality of disclosures. No intra-sector weighting is assumed, as in this case the cross-sectoral dispersion of the impact of tilting would decline.

[33] Find out more about the ECB's opinion on the development of the European Green Bond Standard in this document.

[34] See ECB Governing Council Press Conference, 9 June 2022