ECB lays out balance sheet run-off, will further favour green firms

Feb 2 (Reuters) – The European Central Bank will partially reinvest proceeds of maturing debt in line with current practice and will favour bonds issued by greener companies as it starts running down its 5 trillion euro bond portfolio from March, it said on Thursday.

The ECB is laying out details after it announced in December it would run bonds off its balance sheet at an average pace of 15 billion euros per month from March through June.

It will do so by not fully reinvesting proceeds from maturing debt bought under its conventional bond purchase programme, the Asset Purchase Programme (APP), from 2015 as the ECB tried to contain deflation risks in the euro zone.

The process is known as quantitative tightening, or QT.

The ECB will allocate proceeds remaining after the rundown proportionally to upcoming maturities across its public sector, corporate, covered bond and asset-backed security portfolios, it said in a statement.

For its public sector holdings, it will reinvest in proportion to upcoming redemptions by each country and across governments versus supranational debt, the bank said.

Following December’s decision, “I think we’re adding two principles that will matter, which is simplicity and neutrality,” ECB chief Christine Lagarde told a news conference.

“So that you know, we don’t do things in an overly complicated manner and we simply apply the proportionality principle to the portfolio across jurisdictions,” Lagarde added.

The ECB said it will stop buying new bonds issued by private sector entities by March, except where corporate issuers have a strong track environmental track record. It will also continue buying green bonds, sold to fund environmentally-friendly projects, in the primary market.

The ECB said it will also would skew remaining corporate debt reinvestments “more strongly” towards companies with a better climate performance, enhancing a process it first started in October.

Lagarde said the bank would be attentive in order to ensure it doesn’t become an “accomplice” to so-called greenwashing, where borrowers exaggerate their green credentials.

It will do so with a “good understanding of the transition plan by the corporates that we eventually reinvest into and a good understanding of the footprint that they have,” she said.

“It will be on the basis of that analysis our own and also reliable analysis that will be provided by experts, that we will orientate our portfolio with a stronger tilting than we had so far.”

The ECB’s decision came as it announced another 50 basis point rise in interest rates.

By raising longer-term borrowing costs, the winding-down of its bond portfolio should tighten financial conditions, making it more expensive for firms and governments to borrow.

Reporting by Yoruk Bahceli; Editing by Catherine Evans

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