Cut the carbon, and your corporate bond could be favoured

VIDEO | Since a year, Finland’s Central Bank is tilting its purchases of corporate bonds so that businesses that are climate-friendly get more financing than they otherwise would. On stage at the PostTrade 360° Helsinki conference, senior portfolio manager Vesa-Ville Virtanen presented the framework.

As the European Central Bank ran a strategy review in 2021, climate change aspects came to form a part – beside the primary objective of keeping prices stable. Together with a collateral framework and adaptations in the risk management, the corporate-bond purchases that take place for monetary policy purposes were identified as a tool to promote decarbonisation.

Since October 2022, these corporate bond purchases are tilted towards issuers with a better climate performance. The decision could matter; the Eurosystem’s central banks hold a total of 374 billion euro in corporate bonds. Bank of Finland is one of six national central banks in the Eurosystem who are implementing this.

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A climate score was calculated for each eligible issuer. This score was developed in-house by the Eurosystem. Per issuer, this score feeds into a broader weighting framework which practically sets a ceiling for how large the investment can be. In other words: the decarbonisation performance will directly impact how large the corporate-bond holding into each company can be.

Setting the criteria on the per-corporation level, the framework can guide purchases in the secondary market, too. In the primary market – that is, when the Eurosystem buys bonds directly upon issuance – specific preferential treatment can be given to green bonds.

Vesa-Ville Virtanen is Principal Portfolio Manager, Market Operations, with Suomen Pankki (Bank Of Finland).