Let’s now consider some of the ways that the ECB might further the cause of sustainability (in order of likelihood – most likely first).
1. Buying green bonds through asset purchases
The most obvious way in which the ECB can incorporate climate change objectives in its policy decisions is through its asset purchases. Indeed, the ECB has already gradually increased its purchases of green bonds as the green bond universe itself has broadened.
2. Buying green bonds for pension funds
The ECB could send a strong message about its commitment to sustainable investment by choosing to allocate more to green bonds in its pension funds and non-monetary policy portfolios.
3. Incorporating the impact of climate change on output, inflation and financial stability in the ECB’s projections
It will be hard for the ECB to incorporate climate change into its own projections given they cover such a short time horizon, but it will no doubt be a much larger factor in the debate than it has previously been.
4. Investing in green companies / activities, not just bonds
To get around the risks related to crowding out private investors from the green bond market, the ECB might invest in green issuers rather than just green bonds in its asset purchases. An extreme version of this would be to exclude all “brown” sectors from asset purchases, but this is very unlikely in our view.
5. Incentivise banks to go green
Rates at which the ECB provides funding to banks could be linked to the banks’ green credentials or the amount of green lending they provide. But we believe this is unlikely at this stage as green scores are still quite unreliable.