ECB to avoid climate laggards’ longer debt in historic shift

Bloomberg

The European Central Bank (ECB) will limit purchases of longer-term debt issued by companies that rank poorly under a new scoring system created to screen out polluters and tackle climate change.
The maturity limit will cut the “longer-term exposure of the Eurosystem to transition risks,” according to a statement. The ECB will also give “special treatment” to green bonds meeting “stringent” requirements and buy more securities from high scorers.
It’s the first detailed look at how the institution will reinvest “sizable redemptions” expected in the coming years.
About 30 billion euros ($30 billion) — 10% of its corporate-bond portfolio — will be reinvested each year in what’s been hailed as the “most ambitious” plan by a central bank to address climate change.
The asset-allocation initiative will enable the ECB to meet its twin goals of reducing exposure to climate-related financial risk and supporting “the green transition of the economy in line with the European Union’s climate-neutrality objectives,” the ECB said.
Central banks globally have been under pressure to do more to ensure the Paris Agreement is met as extraordinary fires, droughts and floods underscore the damage wrought by rising temperatures.
A dozen nonprofit organisations this month urged the ECB to make science-based emission-reduction targets a requirement amid concerns that companies are making inflated claims.
The ECB said issuers whose decarbonisation plans are science-based and verified by a third party will get higher marks under its new scoring system. Higher rankings will mean more purchases.
The ECB said it will tilt the benchmark guiding its buying to higher scorers, and will raise limits on how much it purchases from each issuer so it can buy more bonds from the better performers.
Its practice has been to buy more bonds from big issuers. In the future, market capitalisation size will be supplemented by the climate score. That’s comprised of three parts: past emissions, including sector-level Scope 3 pollution (those generated by a product or service’s use); future emissions, including reduction plans; and quality of disclosures.
The ECB said it will favor companies that provide “high-quality” emissions reports and ambitious decarbonisation plans. Those that don’t have self-reported emissions data, provide little information and have weak or no plans to address climate change will get low scores.