Energy, Tech and TelCo the most harmed sectors by the ECB’s green tilt
The ECB has been buying, since October 2022, securities for its CSPP portfolio using its ‘green tilting’ approach, in line with the methodology it set out earlier in the year. In this piece, we investigate whether we can derive some ‘hints’ from which securities have been mostly impacted by it, both positively and negatively. We show that utilities and consumer are sectors that have been benefiting from the ‘green tilt’, while this is the opposite for energy, technology and communications. Moreover, the ECB also seems to have bought significantly more green bonds during this period.
The ECB announced last year that it would start to apply the “green tilt” to its Corporate Securities Purchase Programme (CSPP) portfolio through reinvestments as of the 1st of October 2022 (see here). While individual scores are not disclosed, it is possible to infer some of the “climate friendly” preferences of the ECB by looking at which securities were added during this period.
The charts below show in terms of sector (left) and label (right) what the share of new securities bought from 1st of October until today has been. Unfortunately, as we do not have access to the amounts bought, and given that the ECB no longer follows a “market approach”, the analysis had to be done in terms of security ID’s, instead of volumes. Still, the picture here seems to be clear: from all the securities bought during the last 7 months, the ECB had a clear preference for utilities (26% of the securities bought) and consumers staples/discretionary (26%). On the other hand, only 4% of the bonds acquired were from energy issuers and 2% from technology. With regards to energy, the purchases were actually limited to only one issuer: Neste Oyj. Although classified as energy, the Nordic company is the world’s leading producer of sustainable aviation fuel, renewable diesel and renewable feedstock solutions. Hence, still implying an issuer within the energy sector that likely has a very good ESG score, according to the ECB methodology.
Looking at the share of securities purchased that carry a green bond label, we see that these represent 28% of the purchases. While the number might at first sight not seem very high, we highlight that only 12% of the total EUR IG corporate market consists of green bonds, and that 14% of the ECB’s portfolio (pre-green tilting) was made up of green bonds. Hence, there seems to have clearly been a preference from the ECB towards green bonds.
The table on the next page also shows which names were the most bought by the ECB during that period:
The table above also allows us to see that the ECB has been mostly adding new securities from good climate-performing companies at the long-end of the curve. That makes sense, as the ECB has also the ambition to gradually decarbonize its portfolio. Its methodology also includes excluding long-term bonds from companies with low ESG scores (unfortunately, the precise definition of long-term is not disclosed).
All in all, the analysis above allows us to conclude the following: utilities and consumer are clearly sectors in which the ECB will be overweight under its tilting approach, while energy, technology and communications are sectors where the central bank is underweight. From a label perspective, green bonds will (as expected) have better traction at the ECB.
However, in the last ECB meeting, the Governing Council signalled that it expects to discontinue reinvestments under the APP as of July 2023. In this case, as Lagarde had put it: “the jury is out as to how we [ECB] can continue to deliver on our Paris agreement compliant investment and reinvestment programme without the reinvestment phase and how we address that”. That is because the volume of corporate bond purchases by the ECB will continue to be determined solely by monetary policy considerations. This could cap the limited greening of the CSPP portfolio we are seeing today.
Executive Board member Isabel Schnabel mentioned earlier this year during a speech (see here) that actively “reshuffling the portfolio towards greener issuers’”, which implies actively selling bonds of companies with weaker green credentials and substitute these with bonds of greener companies, could be an alternative in this situation. We recommend investors to keep a close eye on upcoming announcements, as the bonds from the sectors and maturity buckets as stated above, as well as labelled and non-labelled green bonds, will be heavily impacted if the ECB indeed decides to take a more active reshuffling approach.