Isabel Schnabel, a member of the Executive Board of the ECB, has given a speech with important implications for Eurozone fixed income markets. The speech signals a welcome paradigm shift in terms of central bank climate policy and addresses a number of concerns that we have previously raised with regards to the ECB’s policies. As context, the ECB owns around €345bn of corporate bonds and trillions of sovereigns and sub-nationals, as well as very large collateral exposures, and so is a key driver of fixed-income flows and valuations in euro-denominated markets.
The two key takeaways are as follows. First, the ECB will switch from a flow to a stock implementation approach to climate management of its portfolio(s). Note that the stock approach will also be implemented in covered bond and asset-backed securities portfolios. The implications of this in terms of valuation of carbon intensive versus less carbon intensive bonds could be significant. Second, the ECB will tilt public sector bond holdings toward green bonds, either by switching from government curves to SSAs, or from government grey bonds to government green bonds (where there is enough volume to do so).
Dr Ulf Erlandsson founded the Anthropocene Fixed Income Institute and was its first CEO. A pioneer of climate-focused fixed income portfolio management, he was named Environmental Finance’s Bond Personality of the Year 2022.
Based in London, Jo leads AFII’s research and a global team supporting fixed income investors as they align their portfolios with climate and sustainability goals. She joined AFII after 18 years in fixed income markets at JPMorgan.
