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.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

Disclosure and disclaimer

More, collapsed
Planes ready to deliver vaccines
The aviation sector – devastated by COVID-19 – is the way to distribute anti-virus vaccines
Join the conversation?

Join our Linkedin group to get an unparalleled view of macro and microeconomic events and trends from a bank that is a leader in both developed and emerging markets.