ECB's Schnabel floats radical ideas for green stimulus

FRANKFURT (Reuters) - The European Central Bank could step up its purchases of “green” bonds and avoid those that it deems unfriendly to the environment to help finance the euro zone’s fight against climate change, ECB board member Isabel Schnabel said on Monday.

FILE PHOTO: Isabel Schnabel, member of the German advisory board of economic experts attends the 29th Frankfurt European Banking Congress (EBC) at the Old Opera house in Frankfurt, Germany November 22, 2019. REUTERS/Ralph Orlowski

Floating some of the most radical ideas to have come from an ECB policymaker, Schnabel was opening the door to a green shift championed by new President Christine Lagarde after being resisted by her predecessor, Mario Draghi, for going beyond the central bank’s remit and being against its rules.

Schnabel said the ECB would consider ditching some of those constraints, such as a pledge to buy company bonds in proportion to their outstanding amount, to fix the market’s “failure” to price climate risk and support decarbonisation in the European Union.

With ECB buying several billion euros worth of corporate bonds and commercial paper every month, the shift could have a major impact on the European market for sustainable bonds, which saw new issuance of around 50 billion euros in the first half of 2020, according to Refinitiv data.

“We could also consider reassessing the benchmark allocation of our private asset purchase programmes,” Schnabel said. “In the presence of market failures, market neutrality may not be the appropriate benchmark.”

The debate will be part of the ECB’s ongoing review of its monetary policy strategy - its first since 2003.

The German academic, who joined the ECB’s board in January and was initially cautious about skewing bond purchases towards green assets, added the ECB could go even further if needed.

“But should such measures not prove sufficient, or should they progress too slowly, we could consider other options, such as, for example, excluding certain bonds – based on clear and transparent rules – that are used to finance projects that conflict with the decarbonisation objectives of the EU,” Schnabel said.

The ECB said last week it would accept as collateral green bonds with payouts linked to a company achieving its sustainability targets and include such debt in its asset purchases.

But in an indication of how small that part of the green bond market is, there is currently only one such bond denominated in euros, issued last year by Italian power company Enel ENEI.MI.

Nevertheless, analysts expect that ECB announcement to trigger an issuance boom.

($1 = 0.8580 euros)

Reporting by Francesco Canepa; Editing by Hugh Lawson