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

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.

About the authors

Johan Jarnmo

Associate Director, Portfolio Strategy

Johan develops tools and analytics that help fixed income investors invest in a climate- and nature-positive way, including AFII’s portfolio tools Co₂liseum and FIONA. He previously worked in Deloitte’s Risk Advisory practice.

Ulf Erlandsson

Founder, Board member

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.

Josephine Richardson

Managing Director, Head of Research

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.