A green revolution in finance is about to begin! On July 8th, President of the European Central Bank (ECB) Ms Christine Lagarde announced that ECB’s green policy is now at the top of its agenda despite earlier reservations that COVID-19 would slow down progress on efforts to reverse climate change.
The ECB’s stance on climate change has never been so explicit. In an exclusive interview with the Financial Times soon after the announcement, Lagarde said that “I want to explore every avenue available in order to combat climate change. This is something that I hold very strongly.”
The ECB will put sustainability at the forefront of its agenda and will hence utilise its corporate bond purchasing programmes to support the green revolution. According to the estimates, the European Union could raise a third of the cash needed for its 750 billion euro ($858 billion) recovery fund by issuing “green” bonds, which would back projects that help the environment.
As it stands, the ECB holds 82 corporate green bonds under corporate bond purchasing programmes, which accounts for 5% of the holdings (based on the number of corporate bonds) although Lagarde mentioned the ECB holds roughly 20% of the green bond universe in terms of the volume, an ING Bank report said.
What does this mean for impact investing? First, In the long-term, ESG environmental, social, governance bonds may outperform non-ESG. If the ECB adds additional focus into green holdings, whereby it increasingly targets green and sustainable bonds, ESG performance will soon follow. Green bonds have so far made up just 3.7% of global bond issuance, making it “difficult for central banks or regulators to ask market participants to build green bond portfolios”, the S&P economists said in a recent report published. Supply will increase and demand will follow suit.
Second, the market reacts positively to the tone from the top. Ms Lagarde’s outspoken support for green bonds will open doors to a strong focus on environmental factors in investment decisions. Investment-grade ESG only mutual funds are already seeing considerably more inflows compared to non-ESG funds. This will only increase.
Third, as market forces begin to favour environment investments, the same attitude will permeate to the way organizations design and deliver their services and products. The environmental orientation will gain traction in supply chains, product and service prototyping and managerial focus.
This decade started with a devastating pandemic but it may as well prove to be a decade for positive environmental and social change.
Photo Credit: Peter Juelich / Bloomberg
