Weekly Update - By greening its monetary policy, the ECB has laid down a marker for investors
The ECB has added a green element into its monetary policy. Although direct market impacts will be limited, the publication of official climate criteria and indicators could act as a structural framework for all investors
The ECB has broken new ground by writing climate issues into its monetary policy. The world's big central banks have long been scrutinising climate issues. Much of their scrutiny looked at the risks posed to financial stability. The Bank of England took a lead on this front, warning of three types of risks climate change poses to financial institutions: physical, transition and liability risks, (1). Central banks have also analysed the potential inflationary impacts of both global warming and energy transition. Then, some months ago, the ECB raised the stakes by incorporating climate criteria into monetary policy. It intends to gradually decarbonise the corporate bonds acquired under its QE programmes and, as from 2024, could also run a green screen over securities posted
Tricky trade-off between inflation and climate policy. The ECB's aspiration to actively support the climate transition is not easy to apply with inflation still running high. To counter price pressures the ECB has substantially hiked its interest rates and this has automatically boosted the cost of the massive funding needed for energy transition. To avoid wrestling with such apparently contradictory aims, the Federal Reserve said recently it would not be considering climate criteria in its monetary policy, this being a matter for states, not central banks. On its side, the ECB has stressed that while its primary mission remains fighting inflation, its climate commitments will help avoid the threat of price instability resulting from a disorderly energy transition.
The ECB could show the way for all market players. From now on, in its monthly purchase programme, the ECB will progressively incorporate three kinds of criteria in selecting corporate bonds: the level of carbon emissions, emission reduction targets and transparency on climate policy. That noted, while the ECB holds significant amounts of public sector debt, its corporate debt holdings are actually relatively modest (chart 1) related to total corporate debt market. What is more, they are due to be reduced in line with the monetary policy decision to reduce the Bank's balance sheet. So, the direct impact of the ECB's policy change is likely to be limited. For all that, the direction taken by the ECB will provide a reference in a booming market (chart 2).
Finally, in the main events of the week, we have chosen to talk about Jerome Powell post meeting interview and to focus on the French trade deficit.