What if...the ECB had decarbonised its portfolio from the start?

15 minute read

The European Central Bank announced operational modalities for how it intends to decarbonise its CSPP portfolio. The ECB’s corporate bond portfolio, currently in excess of EUR350bn, is arguably the biggest player in the euro-denominated market. As such, the allocation of capital within it may have more impact on cost-of-capital for corporates than other traditional factors.

The CSPP was until recently based on market-weights without considering factors such as governance quality or climate impact. In this note, we test a counterfactual case where the ECB reweighted bond purchases to reduce the carbon intensity of its portfolio from 2017 rather than the latter half of 2022, when one could argue that the macroprudential risks of fossils exposures were already known.

We arrive at this by deploying the ECOBAR model that was presented in 2017, such that it could have been deployed for the lion’s share of the purchased programs, and look at decarbonisation metrics as well as performance metrics.

Our results indicate a 10bp (~EUR300mn) outperformance and a significantly lower carbon footprint had it done so. The methodology applied sets the stage for forthcoming AFII developments on portfolio construction in a climate aligned, fixed income context.