Bundesbank boss sets stage for ECB climate clash over bond-buying

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The head of Germany’s central bank has rejected calls for the European Central Bank to use its bond-buying powers to tackle climate change, setting up a potential clash with other policymakers including Christine Lagarde, the ECB president.

Jens Weidmann, president of the Bundesbank, wrote in the Financial Times that “it is not up to us to correct market distortions and political actions or omissions”, adding that “the market price of carbon” is an issue for governments to address — not central banks.

The issue of whether the ECB should use its €3.5tn bond-buying programme to address the mispricing of climate risk has emerged as one of the most contentious areas in the central bank’s review of its own strategy.

Ms Lagarde and other top ECB officials have said recently that the central bank should consider ditching a key principle behind its corporate bond purchases to offset the underpricing of environmental risk in financial markets.

Since the ECB started buying corporate bonds in 2016 it has adhered to the “market neutrality” principle, which aims to avoid distorting relative pricing of securities by only purchasing them in proportion to the overall eligible market. 

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Environmental campaigners accuse the ECB of reinforcing the market’s bias in favour of heavy carbon-emitters such as oil and gas companies, utilities and airlines because these sectors issue more bonds than most others.

Ms Lagarde said in a speech last month: “In the face of what I call the market failures, it is a question that we have to ask ourselves as to whether market neutrality should be the actual principle that drives our monetary policy portfolio management.” 

The ECB president called on central bankers to “ask themselves” if they were taking “excessive risk” by trusting markets to correctly price environmental issues.

Isabel Schnabel, an ECB executive board member, went even further in a recent speech, raising the possibility of “excluding certain bonds” from the central bank’s asset purchases to avoid financing projects that conflict with the EU’s target to be carbon-neutral by 2050.

However, Mr Weidmann defended the principle of market neutrality and said: “It is not the task of the Eurosystem to penalise or promote certain industries.”

“Asset purchase programmes are a component of our expansionary monetary policy. To be effective, they need to be broad-based,” he said, adding: “The principle of ‘market neutrality’ aims to ensure this and prevent us from distorting market outcomes.”

Central bank insiders argued that the position laid out by Mr Weidmann, who is one of the longest-serving members of the ECB’s main decision-making body, was not too different to that expressed by Ms Lagarde. 

They pointed out that the ECB president is yet to say whether or not she believes it should ditch the market neutrality principle, adding that no decision had been made in the strategy review, which is due to conclude next year.

Environmental campaigners argue the ECB should stop buying the bonds of the heaviest carbon-emitters and sell those it already owns in its €243bn corporate bond portfolio. “This was always going to be the frontline of the debate,” said Adam Pawloff at Greenpeace.

Research published by Greenpeace and the UK-based think-tank New Economics Foundation last month found that 63 per cent of corporate bonds held by the ECB were from companies in carbon-intensive sectors, even though those sectors accounted only for less than 20 per cent of jobs and 30 per cent of output in the eurozone.

Mr Weidmann wrote in his FT article that climate change was “one of the greatest and most pressing challenges of our time” and central banks should shrink their own carbon footprints, consider the impact of climate risks on monetary policy and check that banks were taking them into account.

He also said the ECB “should consider only purchasing securities or accepting them as collateral for monetary policy purposes if their issuers meet certain climate-related reporting obligations”, as well as potentially using only credit ratings that incorporate climate risks.

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