The head of the German Central Bank rejected calls by the European Central Bank to use its bond buying forces to combat climate change, which could lead to a possible conflict with other political decision-makers such as ECB President Christine Lagarde.
Jens Weidmann, President of the Bundesbank, wrote in the Financial Times that “it is not up to us to correct market distortions and policies or omissions,” adding that “the market price of carbon” is an issue that is being dealt with Governments – not central banks.
The question of whether the ECB should use its EUR 3.5 billion bond purchase program to tackle the mispricing of climate risk has emerged as one of the most controversial areas in the central bank’s review of its own strategy.
Ms Lagarde and other senior ECB officials recently stated that the central bank should consider abandoning a key principle of buying corporate bonds in order to offset the undervaluation of environmental risk in financial markets.
Since the ECB started buying corporate bonds in 2016, it has adhered to the principle of “market neutrality”, which aims to avoid distorting the relative pricing of securities by buying them only in proportion to the overall eligible market.
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Environmental activists accuse the ECB of biasing the market in favor of heavy carbon emitters such as oil and gas companies, utilities and airlines, as these sectors emit more bonds than most.
Ms. Lagarde said in a speech last month: “Given the problems I have described as market failures, we must ask ourselves whether market neutrality should be the very principle that drives our monetary portfolio management.”
The ECB President urged central bankers to wonder if they are taking undue risk by trusting the markets to correctly assess environmental issues.
Isabel Schnabel, board member of the ECB, went a step further in a recent speech, highlighting the possibility of excluding “certain bonds” from asset purchases by the central bank in order to avoid funding projects that conflict with the EU’s goal to be climate neutral by 2050.
However, Mr. Weidmann defended the principle of market neutrality and said: “It is not the job of the Eurosystem to penalize or promote certain industries.”
“Asset purchase programs are part of our expansionary monetary policy. To be effective, they have to be broadly based, ”he said, adding,“ The principle of ‘market neutrality’ is intended to ensure this and prevent us from distorting market outcomes. “
Central bank insiders argued that the position of Mr. Weidmann, who is one of the longest-serving members of the main decision-making body of the ECB, was not too analogous to that of Ms. Lagarde.
They noted that the ECB President has not yet said whether she believes the principle of market neutrality should be overridden and that no decision has been taken in the strategy review due to be completed next year be.
Environmentalists argue that the ECB should stop buying bonds from the heaviest carbon emitters and sell those it already has in its € 243 billion corporate bond portfolio. “This has always been the front line of the debate,” said Adam Pawloff of Greenpeace.
Research released last month by Greenpeace and the UK-based think tank New Economics Foundation found that 63 percent of corporate bonds held by the ECB came from companies in high carbon sectors, although those sectors accounted for less than 20 percent of jobs and 30 percent of production in the euro zone.
Mr. Weidmann wrote in his FT article that climate change is “one of the greatest and most urgent challenges of our time” and that central banks should reduce their own carbon footprint, consider the impact of climate risks on monetary policy and examine whether banks should take them on consider.
He also said that the ECB “should only consider buying securities or accepting them as collateral for monetary policy purposes if their issuers meet certain climate-related reporting requirements” and possibly only use ratings that include climate risks.