IIPP report finds European Central Bank's corporate portfolio may be financing nature degradation
23 July 2021
UCL IIPP report finds European Central Bank’s corporate QE portfolio may be financing large scale nature and biodiversity degradation.
Photo by Lukasz Szmigiel on Unsplash
A new report by UCL’s Institute for Innovation and Public Purpose and the think tank Common Wealth finds that the European Central Bank’s (ECB) corporate sector asset purchase programme (QE), a portfolio, which makes up 20% of the European Union’s corporate bond market, is exposed to and financing activities potentially highly damaging to nature and biodiversity.
The report, the first ever study of nature-related financial risks on a central bank’s balance sheet, comes a week after the ECB’s monetary policy strategy review committed it to incorporating climate change risk considerations into the criteria it uses for its corporate bond purchases, recognising the failure of the market to account for such risks. Given that climate change and nature and biodiversity loss are interconnected and mutually reinforcing, the report authors argue that the ECB also has a duty to account for risks arising from nature and biodiversity loss within its monetary policy portfolios.
Katie Kedward, lead author of the report and Policy Fellow at UCL IIPP, said:
“The fact that over 70% of the ECB’s corporate sector purchase program (CSPP) is potentially associated with drivers of biodiversity loss suggests it may be undermining the ECB’s secondary mandate to support the broader goals of EU-level economic policy, which includes the ecological transition. In its recent Strategy Review, the ECB committed to ensuring that the CSPP aligns with EU legislation implementing the Paris Agreement. Such alignment should also extend to nature.”
The report suggests the ECB could promote the accelerated uptake of nature-related financial disclosures amongst counterparties involved in monetary policy operations, for example by making disclosure of nature risks a criterion for the ECB buying corporate bonds. Additionally, the ECB could ‘lead by example’ by disclosing its own assessment of the nature-related dependencies and impacts on its balance sheet, including the CSPP/PEPP portfolio but also its pension fund and foreign exchange assets.
Josh Ryan-Collins, Head of Finance and Economics at UCL IIPP, said:
“A major aim of the upcoming COP15 biodiversity conference in Kunming is to ensure that finance accounts for the needs of nature. As a major central bank and holder of 20% of euro-denominated corporate bonds, the ECB’s approach to managing nature-related risks within its portfolio will have considerable signalling power to financial markets and could have a material impact on the uptake of prudent risk management practices relating to nature.”