The European Central Bank plans to gradually revamp its 344 billion euro ($358 billion) corporate debt portfolio to favour greener firms, it said on Monday, taking another step in aligning monetary policy with climate change goals.
The ECB has long said that the fight against climate change is crucial in maintaining financial stability and its bank supervision arm has been pushing the bloc's biggest lenders to improve risk management and disclosure.
In one of its biggest moves yet, the ECB said that starting from October, it will tilt reinvestments of cash maturing from corporate debt towards firms with lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate related disclosures.
"The eurosystem will gradually decarbonise its corporate bond holdings and this will be done by tilting the sizeable redemptions, which are expected to average over 30 billion euros annually in the coming years," ECB board member Isabel Schnabel said.
The ECB bought corporate debt for much of the past decade as part of its ultra easy monetary policy and while new purchases have already ended, cash from maturing bonds will be reinvested back into the market indefinitely.
The ECB will, however not exclude any company from its investment portfolio, hoping to give the big polluters an incentive.
"Those companies that are the least green today will have to do the bulk of the transition, therefore we said that excluding them altogether is not the right approach," Schnabel, the head of the ECB's market operations said. "We want to give all those companies an incentive to become greener."
In making actual investment decisions, the ECB will look at firms' past performance, their planned carbon reduction targets and data publicly disclosed.
The ECB will only rely on publicly available information and will not disclose which holdings it cut or increased.
"This market is heavily biased towards emission intensive firms therefore then we will then have a new benchmark that is tilted over time more towards less emission intensive firms and purchases will be following this new benchmark," Schnabel said.
Further out, the ECB also plans to limit the share of assets issued by high polluters that can be pledged as collateral by banks when borrowing funds from the central bank.