The European Central Bank (ECB) announced on Sept. 19 that it plans to decarbonize its more than €387 Billion corporate bond portfolio starting this October. The financial institution will also introduce climate scores that will be taken into account in future purchase decisions.
This July, ECB said it will include climate change considerations into its monetary policy framework in order to decrease the Eurosystem’s climate-related financial risk and support the EU’s net-zero targets.
The €344 billion corporate sector purchase programme (CSPP) and the €43 billion pandemic emergency purchase programme (PEPP), as well as all other Eurosystem corporate bond purchases, will take climate scores into consideration.
The Eurosystem will drive more bond purchases for issuers will strong climate performance and will use the scores to impose maturity limits on bonds from issuers with weaker performance.
The overall climate score will comprise three subscores: the backward-looking emissions score, the forward-looking target score, and the climate disclosure score.
The backward-looking score looks at the issuers’ past emissions. It compares companies against their peers in a specific industry as well as against all eligible issuers.
The forward-looking target sub-score takes into account the issuers’ objectives on how they plan to decrease greenhouse gas emissions in the future. Companies with more aggressive decarbonization goals will receive a higher score.
The climate disclosure sub-score looks at the way issuers report greenhouse gas emissions. The companies that offer high-quality disclosures will get better scores.
ECB will review the climate scores and methodology regularly and will make changes to take into consideration new information, models, regulation, and ways to assess risk.
The bank will begin publishing climate-related information on its corporate bond portfolio in the first quarter of next year and will report on the progress in line with the Paris Agreement.