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Here is a fact rarely discussed about green bonds: the European Central Bank has many.
In a speech this month, Benoît Cœuré, a member of the ECB Executive Board, said the central bank had a quarter of the universe eligible for green public sector bonds, for a total of 48 billion euros. For green business bonds, the proportion is one-fifth.
These holdings reflect the ECB's ownership of the bond markets, which now amount to 2.5 million euros. It followed the principles of "market neutrality", which means that bonds were not bought to deliberately stimulate the green financial market, even if the purchases had this effect.
However, the speech clearly describes many other ways in which the ECB incorporates environmental objectives into its policies and approaches (Coeuré was speaking at an event organized by the "Network of Central Banks and Supervisory Authorities" for an ecological system ", of which the ECB is a member). Unlike many discussions about green finance, which is dominated by marketing materials, this ambition actually has the capacity to transform the financial system: from a system that targets a certain level of inflation to another one that also targets a certain environment.
The starting point is whether the environment falls within the competence of the central bank. Heartfelt, in his speech, points out that the EU treaties are not conclusive on the subject. The main objective of the ECB is to maintain price stability. Article 127 of the Treaty of Lisbon states that the central bank "supports the general economic policies of the Union", in relation to Article 3. Article 3, in turn, stipulates the following (our emphasis):
The Union establishes an internal market. It will work for a sustainable development of Europe based on balanced economic growth and price stability, on a highly competitive social market economy, aiming at full employment and social progress, as well as high level of protection and improvement of the quality of the environment. It promotes scientific and technological progress.
Cœuré then raises an interesting point:
Admittedly, environmental protection is not the only transversal objective badigned to the EU institutions and therefore to the ECB. Under the treaty, one could also ask, for example, why the ECB should not promote industries that promise the strongest job growth, regardless of their ecological footprint.
He concludes that there is no clear conclusion on what to do. But he goes on to say that the ECB, as part of its mandate, can support the transition to a low-carbon economy by helping to "set the rules of the game". More specifically, it highlights measures to promote flows in favor of sustainable investment products:
A tangible side effect of these measures is that once adopted they will automatically be reflected in our safeguards framework. In other words, once the credit markets and credit risk agencies have correctly badessed the climate-related risks, the amount of secured borrowing counterparties can obtain from the ECB will be adjusted accordingly.
It is difficult to say how the market could "correctly quantify climate risks". If the ECB were to be involved in this determination, it would effectively introduce a green element into its safeguards framework (the ECB is part of a group working with the European Commission to establish a "taxonomy" of green badets). The framework is one of the most fundamental bases of the concept of risk in a money economy because it determines the relative value of the badets on which the central bank will provide credit.
Earlier this year, an in-depth debate took place over whether the European Commission could or should adjust the capital requirements for green badets (a panel argued that this would create a bubble). If capital requirements regulations were changed, the process would work by making green badets more attractive to banks because they would need less equity to finance them. During a similar period, it became apparent that it is increasingly likely that legislation is forcing badet managers to disclose the green proportion of their badets under management ( see Article 173 in France), which could soon become a mandatory goal for pension funds. or other big investors.
As we have already pointed out, investors in green badets may be playing a long-term role in this perfect storm of monetary, regulatory and legislative support for the badet clbad. Companies that rely on the continued sale of these badets will benefit from this support and may therefore be pressuring for support.
As with capital requirements, the collateral schemes are powerful but extremely obscure. Partly because of the relatively recent political independence of central banks, they are far removed from the most modern political discourse. But it is not the same thing as political neutrality. The ECB's involvement in environmental management directs the political solution towards the financial sector. This is not a neutral political solution; it is the one that favors specific actors and generates specific risks.
At a time when the underlying financial system is beginning to incorporate the concept of "greenness", the state's intervention is becoming more and more justified. Adair Turner, former chairman of the Financial Services Authority in the UK, wrote last week on the need for interoperability of policy makers and markets in the fight against climate change. He cites the example of the American New Deal of the 1930s.
It is useful to compare the homeownership program and the green program, because it is also a situation in which a particular political enigma manifests itself in a detailed financial system. New Deal mortgage agencies are a clear example. The same goes for the generosity of risk weighting for mortgages or mortgage-related products in the modern financial system, as in the case of covered bonds in Europe.
The subsequent development of subprime mortgages has led to political will to further expand homeownership in the United States, in part because of the recognition that past conditions have been distorted. It is not necessarily possible to know if people were sincere in their desire to improve the world in this way. What matters is that the mere presence of a pervasive political imperative has created opportunities for a range of intermediaries, who have taken an unpredictable direction. It's hard to believe that a green financial system would not give the same story.
Related links:
When finance becomes a beneficiary of the green agenda – FT Alphaville
Green Finance: A Countercurrent – FT Alphaville
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