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Civil society calls on ECB to exclude fossil fuels from corporate bonds portfolio

EU flags.

Civil society organisations are arguing that it’s the duty of the European Central Bank (ECB) to exclude the most climate-harming corporations, as the driving force behind the high inflation and record-breaking heatwaves hitting the euro area, from its portfolio.

  • ECB is to set out criteria for decarbonisation for its corporate bond portfolio.
  • Concerns about that focus on comparative performance will enable ongoing financing of fossil fuel exploitation.
  • Calls are increasing for all transition and climate plans to be aligned with the 1.5 goal and that will put pressure on credibility and performance for companies and investors alike.

A group of 12 civil society organisations – including the New Economics Foundation, WWF, Greenpeace Germany, Positive Money Europe, Reclaim Finance and SumOfUs – released an open letter to the governing council of the European Central Bank (ECB) outlining a set of minimum requirements the ECB’s approach to greening its corporate bond holdings should meet.

The challenge of transition finance – is better comparative performance enough?

According to the ECB’s July 2022 statement, these new criteria mean that the share of assets on the Eurosystem’s balance sheet issued by companies with an allegedly “better climate performance” will be increased compared to that by companies with a “poorer climate performance”.

The ECB noted that “better climate performance will be measured with reference to lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate-related disclosures”.

The problem is that if the focus is on those companies that ‘perform better’ it leaves a lot of room for what is often called ‘transition finance’ but usually involves providing finance for fossil fuels companies that are not effectively transitioning.

Will the ECB’s approach allow for the financing of new fossil fuels?

The group argues that if that is the case,  the ECB will keep on buying bonds from even the most polluting companies, including companies that are developing new fossil fuel production projects.

Instead of being solely compared to others on a set of partial indicators, companies should also be judged based on science-based climate milestones that ensure their activities and plans are not hampering climate mitigation efforts.

For example, a company that does not plan to exit coal by 2030 in the EU/OECD and 2040 worldwide may score relatively better than other companies on the set of indicators selected by the ECB – let’s say if it develops sufficient renewable energy to lower its carbon intensity and discloses elements on its emissions – but will always remain incompatible with keeping global warming under 1.5°C.

The group argues that for the ECB to implement a meaningful decarbonization framework for its corporate asset purchases, four recommendations must be followed:

  • Exclude companies that are especially incompatible with climate goals, starting with coal companies and companies that are developing new fossil fuel production projects. This recommendation aligns with the ones of the recent Call to Action to Ensure Transition to a Net Zero and Nature Positive Economy addressed by 90 CSOs – including Reclaim Finance – to central bankers and regulators worldwide.
  • Rebalance the portfolio to prioritize carbon neutrality over market neutrality, thus significantly reducing the portfolio’s carbon footprint.
  • Require companies to adopt 1.5°C-aligned transition plans.
  • Make sufficient climate disclosure an immediate eligibility requirement.

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