(Bloomberg) — The European Central Bank must question whether mirroring the composition of the bond market in its asset purchases is appropriate in light of climate risks, according to President Christine Lagarde.
Her argument centers on whether investors are correctly pricing bonds issued by polluting companies. With the European Union pushing an aggressive agenda to make the continent climate-neutral by the middle of the century, those assets might drop in value, posing a risk to the central-bank balance sheet.
The ECB is currently assessing how it conducts policy, looking at issues from inflation measurement to climate change. For years, it’s faced criticism that its stimulus is tilted toward supporting brown industries — because those companies have a strong record of issuing corporate bonds, and the ECB has insisted that its purchase programs must reflect what the market offers, without discriminating against certain industries.
Under the leadership of Lagarde, who took over last November, officials have been increasingly focused on the question of how monetary policy can be “greener.”
“In the face of what I call the market failures” we have to ask “whether market neutrality should be the actual principle that drives our monetary-policy portfolio management,” she said in an online speech on Wednesday. “I’m not passing judgment on the fact that it should no longer be so, but it warrants the question and this is something we are going to do as part of our strategy review.”
Lagarde also said that central bankers “will have to