The European Central Bank re-started its quantitative-easing programme in 2019 and enlarged it to stimulate the Eurozone economy during the pandemic. But could we see a Green QE programme in 2021, even though the ECB already owns 20 per cent of eligible green corporate bonds?
Companies and governments issue green bonds to finance environmentally-friendly projects while central banks purchase assets under quantitative-easing programmes to promote growth and inflation.
The ECB’s current mandate is to support the European Union’s economic policies if that is consistent with its main objective, maintaining price stability. But a strategy review into how to interpret that mandate is due to report in the second half of 2021.
The review agenda includes climate change – something green bonds are designed to tackle. But need a Green QE wait for the review to conclude? We think the ECB has four options.
First, the bank could change nothing, saying that green bonds – plus sustainability, social, transition and sustainability-linked bonds – already qualify for its existing asset-purchase programmes. However, the bank is under pressure to be seen to do something to address climate change.
Option 2 is not to go green, but to exclude bonds from un-green sectors or which fund ‘bad’ activities such as fossil fuels maturing after, say, 2030. Market neutrality limits the ECB’s ability to pick winners and losers, but the bank could argue that climate change threatens price stability, so bonds financing carbon-intensive sectors should be avoided.
Or it could say that negative screening supports the EU’s economic policies and is consistent with the ‘Do No Significant Harm’ principle. So we see a limited form of negative screening as quite possible after the strategy review’s conclusion.
The third option would mean the ECB, when buying bonds under its existing asset-purchase, would favour green assets where possible.
This would take green bonds away from existing investors – though, with private-sector demand strong, it might encourage more new issues, especially from bodies yet to issue green bonds. But this option too is dependent on the strategy review and not in keeping with past ECB behaviour – so unlikely.
The fourth option is simply to launch a separate Green Bond Purchase Programme. It might also buy sustainability-linked bonds with coupons linked to environmental targets, which are eligible as ECB collateral from January 2021.
Green QE has disadvantages, however. It would cannibalise existing programmes and strongly favour sectors such as utilities that successfully issue green bonds but do little to help hard to abate sectors. And it too would take away green bonds from existing green-bond investors.
But by declaring green bonds a separate asset class the ECB might be able to launch Green QE before the strategy review ends and would avoid having to argue for green assets per se by claiming they are an important and growing asset class that a central bank cannot ignore.
So we could potentially see Green QE shortly after June 2021, when the Pandemic Emergency Purchase Programme is scheduled to end – with an announcement long before that.
First published 30 November 2020.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Dominic Kini and Jonathan White
Fixed income: Basis for financial analysis
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Definitions for fundamental credit and covered bond recommendations
Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve within the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable for up to six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate within the next six months.
For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.
Definitions for trades (Rates & Credit)
Buy and Sell refer to a trade call to buy or sell a bond, option on an interest rate swap ("swaption"), interest rate cap or floor, inflation cap or floor, or Total Return Swap ("TRS"). The buyer/seller of a TRS receives/pays the total return of the underlying instrument or index at the end of the period and pays/receives the funding leg.
Buy protection and Sell protection refer to a credit default swap (CDS): the protection buyer/seller is effectively selling/buying the reference entity's credit risk.
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Payer and receiver refer to inflation caps or floors and to swaptions: a payer is an option giving the right but not the obligation to enter a paid position in an interest rate or inflation swap, and a receiver is an option giving the right but not the obligation to enter a received position in an interest rate or inflation swap.
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RASW (also reverse asset-swap, Sell on asset swap, Sell on an asset swapped basis): Sell a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
Distribution of fundamental credit and covered bond recommendations
As of 26 November 2020, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
All Covered issuers Issuers to whom HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Overweight 128 27 81 63
Neutral 217 46 106 49
Underweight 125 27 49 39
For the purposes of the distribution above the following mapping structure is used: Overweight = Buy, Neutral = Hold and Underweight = Sell. For rating definitions under both models, please see "Definitions for fundamental credit and covered bond recommendations" above.
Distribution of trades
As of 30 September 2020, the distribution of all trades published by HSBC is as follows:
All Covered instruments Issuers to whom HSBC has provided
Investment Banking in the past 12 months
Recommendation Count Percentage Count Percentage
Buy 157 69 95 61
Sell 69 31 29 42
For the purposes of the distribution above the following mapping structure is used: Buy/Sell protection/Receive/Buy Receiver/Sell Payer = Buy; and Sell/Buy protection/Pay/Buy Payer/Sell Receiver = Sell. ASW is counted as a buy of the bond and a paid swap, and RASW as a sell of the bond and a received swap. For rating definitions under both models, please see "Definitions for trades (Rates and Credit)" above.
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