ECB bond holdings exposed to nature-related financial risks – paper

Central banks’ bond purchases could be exposing them to nature-related financial risks, as well as contributing to climate change and biodiversity loss, new research finds.

The paper, published by University College London, focuses on the European Central Bank’s corporate bond holdings. Researchers Adrienne Buller, Katie Kedward and Josh Ryan-Collins draw on the Encore database, which highlights how economic activity both impacts and depends upon the natural world.

The authors find 40% of the ECB’s corporate bond portfolio has “high or very high dependencies” on ‘ecosystem services’. These are natural processes from pollination to climate regulation, soil quality and water supply, on which much economic activity depends. “This means that the loss of these ecosystem services would disrupt production and cause material financial losses,” the authors say.

At the same time, economic activity impacts the natural environment, worsening climate change and harming ecosystem services. The researchers find as much as 70% of the portfolio may be contributing to the drivers of biodiversity loss and 25% contributing to climate change.

A spokesperson for the ECB declined to comment on the “exact numbers and the results mentioned in the report”.

“However, as part of our recent strategy review, we have decided on an ambitious action plan to include climate change considerations in our monetary policy strategy,” the spokesperson added. “As a central bank we recognise the need to incorporate climate considerations into our policy framework as climate change and the transition towards a more sustainable economy also affect the outlook for price stability.”

The ECB’s recent strategy review saw it take a clearer line on making its own operations greener, including enhanced due diligence on corporate bond purchases. The central bank also plans to incorporate climate change criteria into its bond-buying framework and collateral eligibility rules. It is working to promote better disclosures on broader environmental sustainability.

The ECB will disclose climate-related information on the corporate sector purchase programme by the first quarter of 2023, and conduct a climate stress test of its own balance sheet in 2022.