Among the many initiatives planned with the Next Generation EU there are also Green Bonds, bearing witness to the centrality conferred by the ECB on environmental sustainability and the commitment to integrate climate change into the monetary policy framework. To analyze its strategies is an analysis by the Intesa Sanpaolo Study Centre, which comments on the latest results of the strategic review published on 8 July, on the eve of the issuance of the first NGEU green bond expected in October, when part of the 35 billion euro funding envisaged for the fourth quarter of the program will be placed on the market Next Generation EU Green Bond Framework (GBF) launched by the European Union last week.
The publication of the GBF confirms the European Union's commitment to achieving the ambitious goal of reduction of greenhouse gas emissions by 55% compared to the 1990 level as envisaged by the latest package of legislative proposals adopted last July "Fit for 55" and "carbon neutrality" by the end of 2050. In order to meet the commitments undertaken, the EU has set a target of 250 billion spent on climate-sensitive investments, equal to 30% of the total of the Next Generation EU, which will be financed through the issuance of green bonds in the period 2021-26. The green bond issues will thus allow the European Union, recall the analysts of Intesa Sanpaolo, to become the the world's largest green bond issuer for volumes and to support the development of the market.
"The importance of favoring an "orderly" transition towards economies with zero climate impact - claims Intesa's Green Bond Brief - reflects both a priority of the European Union and a condition for the achievement of price stability, the primary objective of the ECB. Numerous speeches by members of the Governing Council in recent months have in fact underlined that the consequences of environmental warming can no longer be overlooked since increasingly frequent inundations, floods and other extreme climatic events cause physical damage, affect the real economy and hinder the transmission of monetary policy”. The plan adopted by the strategic review integrates some measures already undertaken by the ECB aimed at promoting environmental sustainability such as the admissibility, starting from 1 January 2021, of securities with coupons linked to performance with respect to one or more sustainability objectives (sustainability-linked bonds) as collateral in refinancing operations with the Eurosystem.
Furthermore, in February 2021, the ECB announced that a Eurosystem-wide agreement has been reached on the importance of disclosure and understanding of climate risks and that annual information on gaseous emissions and other parameters will be made public within two years sustainability issues linked to the assets in the euro-denominated non-monetary policy portfolios. The climate change implementation program it is structured according to phases and timing, the details of which are included in the attachment to the press release (Detailed roadmap of climate change-related actions) and is divided into two areas. On the one hand, the ECB aims to adapt the analytical tools for a correct assessment and understanding of climate risks by improving forecasting and macroeconomic models and introducing statistical indicators that quantify the exposure of financial institutions to climate risks and their impact environmental (measured in terms of gaseous emissions or other parameters).
Subsequently, monetary policy tools will be adjusted to incorporate the new integrated analytical plan. The ECB has already launched a study to quantify the impact of climate change on the financial system and the economy which includes a stress test to verify the resilience of euro area banks to various assumptions of climate transition scenarios. The first pilot stress test on the Eurosystem's balance sheet is planned for 2022. The ECB has also published a guide on how credit institutions manage climate-related risks ( Guide on climate-related and environmental risks). President Christine Lagarde, on the occasion of an official speech, underlined that only 20% of banks assess risks systematically climatic conditions while 90% do it partially and incompletely or do not do it at all.
So how to proceed? “Different methodologies can be implemented to align the portfolio of corporate bonds held by the ECB with the principles of environmental sustainability, as declared by Isabel Schnabel, member of the Executive Board of the European Central Bank”, says Intesa Sanpaolo. One approach would involve the total exclusion from purchases of sectors with a high rate of pollution (negative screening criteria). However, the drawback of this is that it would reduce the incentive for polluting companies to decrease greenhouse gas emissions. An alternative approach (“tilting strategy”) instead envisages a gradual rebalancing of purchases in line with a progressive alignment with the principles of sustainability and which would take into account the progress of the issuers in reducing the environmental impact.
This approach would have as a critical element any mispricing that could derive from purchases made in a context of low liquidity of the market, which is still developing. The ECB will publish information on the CSPP portfolio with regard to environmental sustainability parameters starting from the first quarter of 2023.
