Incorporating Climate Change in the Eurosystem's Corporate Sector asset purchases : Design of a Climate Change Score

Sammanfattning: The new European Central Bank’s strategy review, unveiled in July 2021, has placed climate change at the core of its new monetary policy strategy. As climate change affects price stability through physical and transition risks, climate change considerations belong to the Eurosystem’s primary mandate. Since climate risks are not integrated into prices by the financial markets, neither by the rating agencies in their credit ratings, the Eurosystem must integrate its own climate criteria in its monetary policy instruments. This paper focuses on the corporate sector asset purchases instrument, namely the Corporate Sector Purchase Programme (CSPP) and the private sector part of the Pandemic- Emergency Purchase Programme (PEPP). It combines monetary policy and climate data to develop Climate Change scores for each eligible issuer. The score aims to identify the best and worst issuers in terms of climate change considerations to operate a tilting of purchases towards the best and away from the worst. The paper first sets forth the construction of the Climate change score, built on backward-looking, forward-looking and disclosure metrics, to make it robust against critics, robust over time but also scalable to ensure feasibility. It then analyses the empirical results and its operational implications on the tilting. It concludes that the tilting is heavily influenced by the skewness characteristic of the eligible universe. It also elucidates the need for more granularity, both for the sector’s taxonomy, the scores and the envelopes. Finally, it shows how the final design depends on policy objectives, whether it is to finance the green transition or a purely balance-sheet protection, or a combination of both.