ECB’s Villeroy Proposes Climate Leap for Corporate Bond Program

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ECB’s Villeroy Proposes Climate Leap for Corporate Bond Program

William Horobin

(Bloomberg) -- The European Central Bank should introduce climate criteria for its corporate bond-buying program, Bank of France Governor Francois Villeroy de Galhau said, opening a new front in a controversial debate over how to make monetary policy greener.

“I propose to start decarbonizing the ECB’s balance sheet in a pragmatic, gradual and targeted manner for all corporate assets, whether they are held on the central bank’s balance sheet or taken as collateral,” Villeroy said at a conference on climate finance in Paris.

The ECB has so far avoided actively discriminating against certain assets on the basis of environmental criteria in their quantitative-easing programs. Some officials are concerned that they risk being diverted from their mandate of price stability, and undermining their independence by choosing which industries to support.

Still, President Christine Lagarde has made clear that she won’t stay out of the fight against climate change, telling European Parliament lawmakers this week her institution is “determined” and will “do more.”

Villeroy said the ECB could “tilt” its purchases of corporate bonds to limit issuers with a poor climate performance and favor those who are aligned with commitments to reduce global warming. For collateral posted against central-bank loans, the valuation of assets should be adjusted according to transition risk.

He argued that climate is linked to price stability because it can impact inflation. He listed the possibility of climate shocks being stagflationary by driving up prices and suppressing activity; the higher costs of transitioning to cleaner energy; the impact on food costs; and a link between higher temperatures and productivity. Lagarde made similar arguments during her parliamentary speech.

“The Eurosystem’s consideration for climate change is neither an abuse of its mission, nor a mere militant belief or fad; it is an imperative that we must pursue in the very name of our current mandate and to ensure the smooth implementation of monetary policy,” Villeroy said.

The Bank of France governor said his proposals don’t cover sovereign assets because it’s too difficult to differentiate between the policies of different governments. Focusing on corporate bonds is more appropriate, he said, as there are already climate indicators for most businesses.

The ECB’s current contributions to tackling global warming include incorporating risks in their own models and projections, as well as encouraging more transparent disclosure from market participants.

It is using climate criteria for its own-funds portfolio, and has announced the formation of a new climate change center to coordinate its work on how to help fight global warming.

Villeroy acknowledged that his proposed program for climate action is “ambitious,” but said it could still be decided on by the end of the year and implemented in three to five years.

“This ambition requires great dexterity; but it is rooted in a conviction: we have in our hands the tools to move forward, concretely, strongly,” he said.

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