Is it desirable to incorporate climate action into the European Central Bank's quantitative easing program?

THESIS

Name:

Student number:

Track:

Field:

Number of credits thesis:

Title:

Assigned supervisor:

Wordcount (excl. contents,

2

TABLE OF CONTENTS

2. The ECB’s Asset Purchase Program 6

2.1 The ECB and Quantitative Easing 6

2.2 The Asset Purchase Program and the Corporate Sector Purchase Program 8

2.3 Results of the CSPP 9

2.4 How Neutral is the CSPP? 9

3. The Case for the Incorporation of Climate Action 14

3.1 Stranded Assets 14

3.2 Market Failure 15

3.3 The Indispensability of Central Banks in the Transition to a Low-Carbon Energy System 15

3.4 Distributional Effects 16

4. The Case against the Incorporation of Climate Action 16

4.1 Required Involved Companies 16

4.2 A Central Bank is not the Appropriate Entity 17

4.3 Slow Transition 18

5. Alternatives within Central Banks 18

6. Conclusion 19

References 21

Statement of Originality

This document is written by Student Anniek van Eijkern who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

3

GLOSSARY

APF Asset Purchase Facility

APP Asset Purchase Program

BoE Bank of England

CO2 Carbon Dioxide

CO2e Carbon Dioxide Equivalent

CSPP Corporate Sector Purchase Program

ECB European Central Bank

ESCB European System of Central Banks

GHG Greenhouse Gas

GVA Gross Value Added

ISIN International Securities Identification Numbering NCBs National Central Banks

QE Quantitative Easing

4

ABSTRACT

This report examines whether it is desirable to add green aspects to the current eligibility criteria of the European Central Bank’s Asset Purchase Program, given the influence the European Central Bank may exert on the ever-growing climate problem. Both the deteriorating climate and the amount of investments needed to fight this, raise the question whether the eligibility criteria of the Corporate Sector Purchase Program should be altered in order to include more sustainable companies in terms of climate change. The existing criteria cause a skewed distribution of instruments purchased, even though the European Central Bank pursues a neutral position, which ensures that companies that provoke climate change are financially supported. Adding green criteria could stop Central Banks from investing in assets that might become stranded when fossil fuel remains unexploited. By reducing the number of investments in these assets, there will be less market failure caused by negative externalities related to climate change. Although it is clear that the European Central Bank should stimulate climate improvement, the addition of green criteria comes with several drawbacks. The existing criteria should ensure that purchased assets have low risk and high ratings. Given the higher risk and uncertainty, often associated with green instruments, adjusting or replacing criteria might increase the overall risk and decrease the overall rating of the portfolio. In addition, the pursuit of climate improvement is not part of the limited mandate of the European Central Bank. This is, among other things, the reason why a green distribution is not neutral nor realistic when the actual distribution of the world is still brown. In conclusion, it is decided that climate action within Central Banks is necessary. However, extensive research on the appropriate implementation is required.

1. INTRODUCTION

1.1 Motivation

There are many legitimate concerns about climate development: the greenhouse effect leading to global warming, a carbon bubble about to burst. Although current economic developments may increase human and physical capital, in multiple cases this is at the expense of natural capital (Coxhead, 2007). Without additional measures to reduce the current emission of greenhouse gasses (hereafter: “GHG”), the global average temperature will be increased by 3.7 °C to 4.8 °C in 2100, compared to pre-industrial temperature levels (IPCC, 2014). Examples of the impact of climate change on the Dutch financial sector are (Regelink, Reinders, Vleeschhouwer, & van de Wiel, 2017):

- The costs and the risks of the transition to a low/neutral-carbon energy system and the risks associated with financing this new energy system by, for example, sustainable bonds;

- The impact on insurers due to, for example, claims related to change in the weather;

- The risk of floods in the Netherlands. When serious flooding occurs, the damage can amount to 60 billion euros, which is likely to be only partially absorbed by Dutch financial institutions.

However, not only climate change itself, but also action to combat climate change entails risks:

“The transition to a carbon-neutral economy that has now been set in motion is also likely to affect the financial sector. Climate policy measures and rapidly advancing carbon-neutral technology trends could lead to write-downs of loans and investments in companies with carbon-intensive production processes.

Financial institutions must focus more on these risks.” (De Nederlandsche Bank, 2018, p. 26) This fundamental move to a carbon-neutral economy, and therefore moving away from carbon-intensive firms, could cause a decrease in the value of the carbon-intensive firm’s financial assets. This might

5 subsequently lead to losses for investors holding these financial assets, like pension funds and central banks (Matikainen, Campiglio , & Zenghelis, 2017). Therefore, research about climate change, policies associated with climate change and their consequences is crucial.

In terms of sustainability, climate change is the most pursued aspect within the financial world, which is the 13th _{goal of the United Nation’s Sustainable Development Goals (hereafter: “SDGs”). The SDGs were}

introduced in 2015 to foster the progress in the field of poverty, hunger, the planet, prosperity, peace, and partnership. The SDGs are subdivided into seventeen goals that should lead to sustainable development both on a global level and within companies. The 13th _{SDG should lead to the transition to a}

neutral/low-carbon economy and energy system (United Nations, 2015).

1.2 Research Question

In 2015, the European Central Bank (hereafter: ”ECB”) started its asset purchase program (hereafter: “APP”). This program, commonly known as quantitative easing, is aimed at increasing economic growth and achieving and maintaining a stable price level. The ECB’s definition of price-stability is inflation close to but not higher than two percent (van Lamoen, Mattheussens, & Droes, 2017). In March 2016, the ECB announced that corporate bonds would be included in the APP from June 2016. This part of the APP is called the Corporate Sector Purchase Program (hereafter: “CSPP”). By looking at the corporates that are part of the CSPP, corporates like Shell and Akzo Nobel can be found. These are companies that would not intuitively be associated with fighting climate change, but with causing climate change instead (The European Central Bank, 2018a).

Considering the amount of investments that is needed to realize the energy transition, the question can be asked whether Central Banks should play an active role in promoting sustainable development (The United Nations Environment Inquiry, 2017). This paper will not be about the debate whether the ECB has the mandate to pursue the incorporation of climate action or not, because this may be a more legal than economic debate. Nor will this paper investigate the incorporation of SDG in the supervisory role of the ECB regarding financial institutions. This paper will be about whether the incorporation of the 13th SDG in the implementation of the Quantitative Easing (hereafter: “QE”) program is desired.

Is it desirable to incorporate climate related criteria into the European Central Bank’s Corporate Sector Purchase Program?

1.3 Relevant Literature

There are several ways to conduct this research. One way is comparing companies currently involved in the CSPP with companies that would meet certain climate action criteria. Since there are more than thousand companies involved (The European Central Bank, 2018b), it would be hard to collect the data of these companies, while selecting a handful of these companies could cause a biased sample. It will have to be determined to which green criteria companies have to comply with. If these are not appropriate, the result of the study will not be relevant. Moreover, there is little transparency concerning the specific amounts spent on bonds of specific companies. As a result, the result of such a research will only be an estimate of the studied effect.

Another way, used in this paper, is conducting research on existing literature and using this to draw a conclusion. There are several debated aspects within the literature on climate change. The causes, the direct global impact, the impact on the economy, possible ways to counter climate change, but also the effects of countering climate change are discussed. Most of the literature agree on four points about

6 climate change in general. The first point of agreement is that the effect of climate change on welfare has a relative small, negative, effect on the change in GDP. Second, the short-term effects of the increase in temperature can be positive, like a decrease in the cost of heating, but negative long-term effects will follow if the temperature keeps rising. The third point of agreement is that disastrous events, like tsunamis and floods, are more likely to happen than major positive events as a result of climate change. The last point is that underdeveloped countries are more exposed to the negative impacts of climate change, since a large share of their economic activity takes place in sectors, like agriculture, that are dependent on the weather (Bernard & Semmler, 2015).

In addition to literature on the direct consequences of climate change, another part is about the so called ‘real’ costs of carbon. The social cost of carbon is defined as the marginal cost of a small increase in GHG emissions compared to a situation in which the emissions do not increase. The key objective is to estimate the actual benefits of reducing GHG emissions. It is used, among other things, to determine whether there is a level of GHG emissions where the social cost of carbon is zero. Since climate change is for a large part due to irreversible GHG emissions of the past, future GHG emissions of zero do not necessarily mean a social cost of carbon of zero (Pearce, 2003).

“Since nothing can be done about those emissions, the relevant ‘policy window’ relates to the difference between projected levels of warming from ‘doing nothing’ and the level of warming that will occur

anyway, owing to time lags in the climate system.” (Pearce, 2003, p. 363)

This makes it, among other things, difficult to define appropriate measurements and a suitable timeframe in which change must take place (Pearce, 2003). The social cost of carbon is relevant for determining whether it makes sense to add green criteria to the CSPP, since it tries to provide more insight within the true effects of reducing the exploitation of carbon.

Most literature specifically written about the subject of this paper is more about whether the ECB should play an active role in the promotion of sustainable development than about the ability and the effectiveness of doing so. Campiglio (2016), discusses in his paper the ‘potential role of monetary policies’ within sustainable development.

“This discussion is relevant for green investment because not enough credit, whether reallocated by non-bank investors or newly created by non-banks, seems to be flowing to low-carbon sectors … The relatively

higher degree of risk associated with low carbon sectors represents a major disincentive to channel resources to them.” (Campiglio, 2016, p. 223)

Campiglio’s paper focuses on the problem of climate change and gives the intervention of the central bank as a possible solution, but it does not specifically pay attention to whether this solution is feasible and, in particular, desirable.

2. THE ECB’S ASSET PURCHASE PROGRAM

This section will begin with an introduction of the ECB and an explanation of QE. After this, the APP and the CSPP will be explained. Finally, the current neutrality of the ECB in the CSPP will be discussed.

2.1 The ECB and Quantitative Easing

The ECB was founded in 1999 and with the National Central Banks (hereafter: “NCBs”) of the 28 members of the European Union it forms the European System of Central Banks (hereafter: “ESCB”). The ECB is

7 owned by the NCBs of the Euro countries. These NCBs, together with the ECB, form the Euro system. The Euro system’s primary task is to determine monetary policy for the Euro area and to give guidance to the NCBs for the application of these decisions on monetary policy, in order to achieve the primary goal of price stability (Mishkin, Matthews, & Giuliodori, 2013).

The primary objective is quite narrow. The ECB is considered as the most independent central bank and this is mainly due to being undemocratic.

“The Treaty states that the ECB must not seek or take instruction from any institution, government or other body. At the same time, Member State governments and other EU institutions are not allowed to

influence the decision-making bodies of the ECB.” (The European Central Bank, 2017a)

Since an undemocratic institution is only acceptable if the mandate is very limited, the mandate should not be too broad given the lack of democratic control. Therefore, the most common argument for an independent ECB is that there could be political influences and pressure that affect monetary policy negatively if the ECB was less independent. Others say that the independence could lead to the pursuit of self-interest instead of the public interest (Mishkin, Matthews, & Giuliodori, 2013). The QE program raises questions regarding both the ECB’s independence and the legal mandate (Transparency International EU, 2017), but first QE will be explained.

Central banks regulate the short-term interest rate, the deposit or lending rate for commercial banks, by selling and buying short-term debt securities. The purchase of these short-term securities decreases the interest rate, due to an expansion of the monetary base (Fawley & Neely, 2013). After the financial crisis of 2008, central banks had to intervene due to the economic stagnation. Several central banks lowered their reference rates to (almost) zero, including the ECB (Matikainen, Campiglio , & Zenghelis, 2017).

The ECB sets three key interest rates for the commercial banks within the euro area. The overnight deposit and lending rate and the main refinancing rate. The main refinancing rate is the rate for which commercial banks can borrow from the central bank for a period of one week. Since low interest rates stimulate lending and investing, the ECB’s main refinancing rate started to decrease until it fell to one percent in 2009 (The European Central Bank, 2018b). When the deposit rate is (too) negative, people will choose to keep cash instead of depositing their money with a bank. Therefore, with rates close or equal to zero, central banks needed other tools to stimulate spending (Benford, et al., 2009). This situation is called a liquidity trap and limits the effects of the conventional policy of lowering the interest rate (Fawley & Neely, 2013).

In order to stimulate investments and maintain financial stability, central banks started various unconventional monetary policies to increase the money supply and stimulate lending, including the purchase of financial assets. The Bank of England (hereafter: “BoE”) started with a program commonly known as Quantitative Easing by starting the Asset Purchase Facility (hereafter: “APF”) program (Fawley & Neely, 2013), which will be discussed in section 2.2. The same goes for the ECB, which started the ‘Enhanced Credit Support’ in 2009 (The European Central Bank, 2009), which can be seen as a special case of QE (Fawley & Neely, 2013), and the APP in 2015 (The European Central Bank, 2018a).

QE moves the focus from the level of the interest rate to the quantity of money. It is an example of an open market operation that increases the balance sheet of the central bank by the purchase of assets. The central bank injects money into the economy through this asset purchase (Joyce, Lasaosa, Stevens, & Tong, 2010).

8

2.2 The Asset Purchase Program and the Corporate Sector Purchase Program

The main objective of the APP is to increase economic growth and achieve and maintain a stable price level (van Lamoen, Mattheussens, & Droes, 2017). From June 2016, corporate bonds are included in the APP. The CSPP implements “the direct purchase by the ECB of Investment Grade euro-denominated bonds issued by non-bank corporations based in the Euro area in the primary and secondary markets” (Macchiarelli, Monti, & Vedolin, 2017, p. 7). Figure 2 shows the distribution of the APP.

FIGURE 1: THE DISTRIBUTION OF THE APP IN TERMS OF THE NET PURCHASES BETWEEN JUNE 2016 AND JULY 2017, WITH ON THE LEFT AXIS THE AMOUNT IN MILLIONS OF EUROS AND ON THE RIGHT AXIS THE PERCENTAGE SHARE OF THE APP.

ABSPP:ASSET BACKED SECURITIES PURCHASE PROGRAM,CBPP3:COVERED BOND PURCHASE PROGRAM,PSPP:PUBLIC SECTOR

PURCHASE PROGRAM

SOURCE:MACCHIARELLI,MONTI AND VEDOLIN (2017)

The ECB was not the first central bank to start a policy like the CSPP. In 2009, the BoE started a comparable program, namely the APF program (Fawley & Neely, 2013). The APF program included the purchase of financial assets from the public and the private sector. The goal of these purchases in the private sector was to raise the money supply in the ‘real’ economy so that nominal spending would increase (Joyce, Lasaosa, Stevens, & Tong, 2010). This purchase of financial assets by the central bank should increase the prices of these assets. Higher asset prices would, in their turn, cause a decrease in the cost of borrowing and an increase in consumption and investments. Another positive effect is that higher asset prices are beneficial for the holders of these assets (Benford, et al., 2009). The ECB decided for the purchase of corporate bonds in addition to the already existing APP, to improve the financing conditions of the ‘real economy’ by lending to non-bank companies.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% € 0 € 500.000 € 1.000.000 € 1.500.000 € 2.000.000 € 2.500.000 ABSPP CBPP3 CSPP PSPP APP

APP Holdings June 2016 to July 2017 (in EUR millions)

9 “This program will help to bring inflation back to levels in line with the ECB's objective. But it will also help

businesses across Europe to enjoy better access to credit, boost investment, create jobs and thus support overall economic growth, which is a precondition for inflation to return to and stabilize at levels close to

2%.” (The European Central Bank, 2015)

The monthly purchased amount in 2016 and 2017 fluctuated between four and ten billion euro. Most of this is spent on the secondary market, but also 15 percent on the primary market (The European Central Bank, 2017b). One of the objectives of the CSPP, comparable with the goal of the BoE, is to lower the cost of borrowing (Macchiarelli, Monti, & Vedolin, 2017). The ECB put formulated the following seven conditions to which debt instruments must comply to be eligible for the CSPP (The Governing Council of the European Central Bank, 2016):

1. The denomination is the Euro

2. The instrument has an Investment Grade rating

3. The minimum remaining maturity is six months and the maximum is 31 years 4. The issuer of the instrument is incorporated in a Member State

5. The issuer of the instrument is not a credit institution 6. The issuer of the instrument is a non-financial in nature

7. The issuer is not under the supervision of the Single Supervisory Mechanism and neither under supervision outside the Euro Area.

Since the focus of the APP lays on the price stability, the instruments of the companies involved with the CSPP are selected by their competence to achieve price stability. The seven conditions mentioned must ensure this. However, no certain effect is guaranteed, since this depends on the way companies choose to benefit from the program. This is because the ECB did not establish mandatory rules on how companies should use the provided financial resources (Macchiarelli, Monti, & Vedolin, 2017). The nature of companies’ business, and if the companies contribute to sustainability or not, does not play a role within the selection of the instruments (The European Central Bank, 2018c).

2.3 Results of the CSPP

The aim of the CSPP is to increase asset prices and to lower the cost of borrowing. The change in spreads before and after the press release about the CSPP, hints that the decrease in the yields for both eligible and non-eligible bonds is caused by this new information. Although this is in line with the desired and expected effects of the CSPP, the eased worries about the Brexit and European elections might have played a role too (Macchiarelli, Monti, & Vedolin, 2017). This decrease in yields caused an increase in market activity, which is comparable with the results of the APF of the BoE, and an increase in non-financial corporate debt issuers (Yap, 2016). Due to the improvement of the financing conditions, especially large companies are now able to circumvent the banking system and finance themselves via capital markets. The reason that this is mainly an advantage for large companies, is that small companies are less likely to fund themselves via bonds. The positive result does not only apply to eligible bonds, since there is also a spill-over effect to other, non-eligible assets (Macchiarelli, Monti, & Vedolin, 2017).

2.4 How Neutral is the CSPP?

The reason that no demands are made on the nature of the company or their efforts to be sustainable, is that the ECB pursuits a neutral position. But is the ECB really taking a neutral position now? In the context of this section, neutrality means a perfect display of the real world.

10 Once a week, the ECB publishes a list containing the International Securities Identification Numbers1

(hereafter: “ISIN”) of securities held under the CSPP. The list published on the 29th _{of December 2017}

contains the ISINs of 1054 purchased securities. Since the ECB is not completely transparent in terms of the exact distribution of the billions spent within the CSPP, the way used to approach the distribution of the CSPP is determining how many securities are purchased per company. However, this is only an approximation since the exact amounts are unknown. Table 1 shows the 25 companies from which the highest number of instruments has been purchased and their most recent carbon dioxide equivalent2

(hereafter: “CO2e”) emissions made public.

Name Company Category Number

Purchased

Share of CSPP

Carbon Footprint Year

Total 1054

1 Daimler AG Automotive/cars 23 2.18% No Data Available 2016

2 BMW Group Automotive/cars 20 1.90% 72,826,736 tons of CO2e3 2017

3 Deutsche Bahn Railroad Transport 19 1.80% 21,970,000 tons of CO2e4 2017

4 Anheuser-Busch InBev Brewery 18 1.71% 6,180,000 tons of CO2e5 2017

5 ENI Oil and Gas 17 1.61% 42,450,000 tons of CO2e6 2017

6 Telefonica Emisiones Telecommunication 17 1.61% 2,449,798 tons of CO2e7 2017

7 Unibail-Rodamco Real Estate 16 1.52% 50,731 tons of CO2e 8 2016

8 Deutsche Telekom Telecommunication 15 1.42% 1,554,343 tons of CO2e 9 2016

9 Engie Electricity 15 1.42% 31,372,000 tons of CO2e 10 2017

10 Electricité de France Electricity 14 1.33% 8,300,000 tons of CO2e 11 2016

11 Orange Telecommunication 14 1.33% 1,419,000 tons of CO2e 12 2016

12 Vonovia Housing, Real Estate 14 1.33% 16,427 tons of CO2e 13 2016

13 DANONE Food 13 1.23% 7,000,000 tons of CO2e 14 2016

14 Snam Natural Gas 13 1.23% 1,750,000 tons of CO2e 15 2017

15 Telecom Italia Telecommunication 13 1.23% 906,552 tons of CO2e 16 2017

16 Sanofi Pharmaceuticals 12 1.14% 10,000,000 tons of CO2e 17 2016

17 Royal Dutch Shell Oil and Gas 12 1.14% 73,000,000 tons of CO2e 18 2017

1 _{An ISIN, used for the identification of securities, consists of a two-letter country code, the country where the security is issued,} and a combination of ten numbers (ISIN, 2018).

2 _{Carbon dioxide equivalent (CO2e) is used to express the different forms of GHG emissions in one unit by converting the total} emission into terms of carbon dioxide (CO2) (Brander & Davis, 2012).

3 _{BMW Group (2017)} 4 _{Deutsche Bahn (2017)} 5 _{ABInBev (2017)} 6 _{Eni (2017)} 7 _{Telefonica Emisiones (2017)} 8 _{Unibail-Rodamco (2016)} 9 _{Deutsche Telekom (2017)} 10 _{Engie (2017)} 11 _{EDF (2017)} 12 _{Orange (2017)} 13 _{Vonovia (2017)} 14 _{Danone (2017)} 15 _{Snam (2018)} 16 _{Telecom Italia (2017)} 17 _{Sanofi (2017)} 18 _{Shell (2017)}

11

18 Air Liquide Gasses for Industrial Use 11 1.04% No Data Available

19 Autostrade per L'Italia Motorways 11 1.04% 95,108 tons of CO2e 19 2017

20 EDP Energy 11 1.04% 36,970,000 tons of CO2e 20 2017

21 TenneT Electricity 11 1.04% 2,884,642 tons of CO2e 21 2017

22 Unilever Food 11 1.04% 61,000,000 tons of CO2e 22 2017

23 Gas Natural Fenosa Gas Utilities 10 0.95% 20,500,000 tons of CO2e23 2017

24 Iberdrola Electricity 10 0.95% 26,541,089 tons of CO2e24 2017

25 RTE Electricity 10 0.95% No Data Available

TABLE 1: THE 25 MOST PURCHASED COMPANIES DECEMBER 2017 WITH THEIR CORRESPONDING CO2E EMISSION (IF AVAILABLE).

SOURCE:THE EUROPEAN CENTRAL BANK (2018A) AND PUBLISHED DATA OF THE COMPANIES

By way of illustration, the total emission of GHGs emission of the Netherlands was 165 million tons of CO2e

in 2016. In the same year, the total of GHG emissions of the Eurozone was 4,400 million tons of CO2e (CBS,

2018). The Grantham institute published a study showing that 62.1 percent of the corporate bonds purchases occur in sectors that alone account for 58.5 percent of the Eurozone GHG emissions. This contrasts with the 18 percent share of Gross Value Added of these sectors25 _{(hereafter: “GVA”)}

(Matikainen, Campiglio , & Zenghelis, 2017).

The criteria mentioned in section 2.2 lead to a list of corporates eligible for the CSPP and eventually to the purchased securities. The report of the Grantham Research Institute states that “the CSPP-eligible universe does not reflect the entire bond market, which does not reflect the real economy.” (Matikainen, Campiglio , & Zenghelis, 2017, p. 15). They say, in other words: with the current eligibility criteria, it is almost impossible to create the neutral position wanted.

The ECB distinguishes the following six sectors: consumer, utilities, industrial, communications, energy, others. Looking at figure 2, it can be said that the distribution of the purchases is almost equivalent to the distribution of the sectors within the universe. However, due to the limited number of sectors in which the universe and the purchase are divided by the ECB, it can be quite unclear what these sectors entail.

19 _{Autostrade per l’Italia (2017)} 20 _{EDP (2017)}

21 _{TenneT (2017)} 22 _{Unilever (2017)}

23 _{Gas Natural Fenosa (2017)} 24 _{Iberdrola (2017)}

12

FIGURE 2:THE DISTRIBUTION OF THE CSPP IN 2017 SOURCE:EUROPEAN CENTRAL BANK (2018A)

The classification of the data used in table 2 is the, more detailed, Bloomberg Industrial Classification System (BICS). This shows that, when using a different classification system, a different graph and distribution emerges. 1. Bloomberg Industrial Classification System (BICS) Sector 2. All Euro Corporate Bonds 3. All Corporate Bonds Except Finance 4. Corporate Bonds of Eligible Maturity 5. Investment-grade Corporate Bonds of Eligible Maturity 6. CSPP-eligible 7. Estimated Purchases Communications 4.38% 13.10% 12.81% 10.78% 11.54% 11.11% Consumer discretionary 5.08% 15.20% 15.34% 12.52% 14.37% 11.07% Car/automobile manufacturing 2.16% 6.47% 6.19% 7.98% 9.85% 6.84% Consumer staples 2.35% 7.02% 7.43% 8.43% 7.71% 8.57%

Food and beverages 1.52% 4.55% 4.94% 5.97% 7.00% 6.97%

Energy 2.55% 7.64% 7.29% 8.25% 8.63% 9.54% Integrated Oils 1.71% 5.11% 4.68% 6.03% 7.58% 8.40% Renewable energy 0.18% 0.55% 0.54% 0.26% 0.02% 0.00% Financials 70.72% 12.35% 11.13% 12.30% 8.64% 8.36% Government 0.00% 0.00% 0.00% 0.00% 0.00% 2.62% Health Care 1.76% 5.26% 5.29% 5.98% 4.31% 4.26% Industrials 3.99% 11.93% 12.72% 11.10% 11.16% 10.63% Materials 3.57% 10.69% 11.16% 8.55% 7.62% 7.39% Technology 0.64% 1.92% 1.96% 1.64% 1.58% 1.78% Utilities 4.97% 14.89% 14.87% 20.45% 24.45% 24.67%

TABLE 2:DISTRIBUTION OF THE EUROPEAN CORPORATE BOND MARKET, THE CSPP ELIGIBLE BONDS AND THE ESTIMATED PURCHASES BY SHARE (%) OF THE TOTAL AMOUNT OUTSTANDING

SOURCE:MATIKAINEN,CAMPIGLIO AND ZENGHELIS (2017)

32% _27% 22% _24% 10% _12% 12% _11% 7% _8% 17% 18% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Holdings Universe

Distribution CSPP 2017

13

FIGURE 3:DATA FROM TABLE 2

DISTRIBUTION OF THE EUROPEAN CORPORATE BOND MARKET, THE CSPP ELIGIBLE BONDS AND THE ESTIMATED PURCHASES BY SHARE (%) OF THE TOTAL AMOUNT OUTSTANDING

SOURCE:MATIKAINEN,CAMPIGLIO AND ZENGHELIS (2017)

The column ‘All Euro Corporate Bonds’, which is comparable to the ECB’s ‘universe’, shows a different distribution than the ‘Estimated Purchases’ column. This deviating distribution is mainly caused by the exclusion of financial companies. When comparing the column “All Corporate Bonds except Finance” with the estimated purchases, integrated oils, food and beverages and utilities stand out, since they are over represented. Almost none of the renewable energy issuers are eligible, but the few that are left are not being purchased. So, in this case, the neutrality of the ECB depends on the division of the sectors. Matikainen, Campiglio and Zenghelis (2017) concluded, based on their findings, that the ECB has no neutral position now.

14 A second way to determine the neutrality of the ECB is by means of the GVA. According to Matikainen, Campiglio and Zenghelis (2017), the purchases are not representatively allocated, since the GHG emission intensive sectors have a relatively larger share, namely 58.5 percent, in the CSPP, than in the GVA, 18 percent. Therefore, it is questionable whether the current position of the ECB within the CSPP is neutral.

3. THE CASE FOR THE INCORPORATION OF CLIMATE ACTION

This section will mention four arguments that support the incorporation of climate action in the CSPP: - Stranded Assets

- Market Failure

- The Indispensability of Central Banks in the Transition - Distributional Effects

3.1 Stranded Assets

There are several climate related risks that could affect the financial stability. The BoE divides these risks into three categories (Tanaka, Batten, & Sowerbutts, 2016):

- Physical risks: the risks that arise directly from natural disasters such as floods. An example of a physical risk is the damage to a house after a storm.

- Transition risks: the risks related to the transition to a low-carbon economy. For example, the risks resulting from the repricing of carbon-intensive assets.

- Liability risks: the risks that insurers run when the incurred damage related to both physical and transition risks must be compensated.

The first argument in favor of the incorporation of climate action is about transition risks. One of the consequences of the transition to a low-carbon energy system are stranded assets. Stranded assets are assets that “have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities” (Caldecott, et al., 2016). In the case of climate change, the assets are mostly stranded due to devaluations. This is because not only climate change, but also the actions taken to combat this change entail risks. Both direct and indirect involvement with sectors affecting and causing climate change involves climate-related risk. The systematic risk associated with financial assets which value depends on fossil fuel poses a threat, since the supply of fossil energy is finite (ESRB Advisory Scientific Committee, 2016). Research shows that in order to prevent further deterioration of the climate, to keep the increase in the global average temperature below 2ºC, it is required that “a third of oil reserves, half of gas reserves and over 80 percent of current coal reserves should remain unused from 2010 to 2050 in order to meet the target.” (McGlade & Ekins, 2015). More specifically, when measures are taken to achieve this goal and fossil-fuels become lapsed, gas, oil and coal companies would lose about 28 trillion dollars compared to the situation where no measures are taken (Lewis, Voisin, Hazra, & Walker, 2014). This does not only apply to oil, gas, and coal companies, but also to companies that depend on energy derived from fossil fuels (ESRB Advisory Scientific Committee, 2016). This will not only affect the companies themselves, but also the financial and non-financial entities holding financial assets of these oil, gas, and coal companies. A way to determine how a financial instrument or institution manages an economic crisis, is to conduct a financial stress-test. Performing a stress-test related to the climate is becoming an increasingly urgent matter, because it helps a financial system to react to and absorb shocks related to climate change and climate action (Battiston, Mandel, Monasterolo, Schütze, & Visentin, 2017).

15 According to Henke (2016), there is no reason, no empirical evidence, to assume that the application of green criteria on bonds causes a trade-off between green and non-green bonds. Therefore, based on the results of a stress-test, the ECB can and should determine how climate-related risks should be considered when estimating the risk profile of debt instruments involved in the CSPP and adjust the current eligibility criteria based in this. This may prevent the ECB from experiencing losses due to risk associated with stranded assets.

3.2 Market Failure

The second argument concerns market failure. Market failure occurs when prices do not pass on the right information to consumers and producers. In a free market, information should be automatically transmitted correctly, which should lead to optimal social welfare without intervention being necessary (Pindyck & Rubinfeld, 2013). In other words, in case of market failure, certain actions by market participants result in costs or benefits that are not reflected by market prices which results in a free market that is not able to optimize the social welfare. These costs and benefits are called externalities and the pollution of the environment, caused by fossil fuels, is an example of a negative externality. At present, these negative externalities are not considered when calculating the prices of financial assets (Pindyck & Rubinfeld, 2013). When applied to the CSPP of the ECB, it can be said that negative externalities arise because the ECB grants credit to companies that have a share in the emission of GHGs and in climate change. These negative externalities cause a credit-market failure:

“This ‘credit market failure’ lies in the misalignment between the legitimate pursuit of private interests by commercial banks — which create the majority of the money supply — and the development objectives that a society sets to itself, the achievement of which is conditional to the availability of financial resources

and a certain degree of monetary stability.” (Campiglio, 2016, p. 224)

This credit-market failure is not only a threat to financial stability, it also undermines the Climate Agreement of Paris (Henke, 2016). One of the ECB’s main arguments for not taking these negative externalities into account and for not making demands on the nature of the company or their efforts to be sustainable, is that the ECB wants to take a neutral position. Because the current position of the ECB does not seem to be neutral, it can be said that this argument is not legitimate. In order to prevent market failure, caused by negative externalities related to climate change, the ECB should adjust the current eligibility criteria, so that these negative externalities are considered.

3.3 The Indispensability of Central Banks in the Transition to a Low-Carbon Energy System

The third argument discusses the indispensability of the ECB in improving the climate. The influence the ECB and other central banks can exert on the climate situation is so significant that it is striking that it has been neglected (Ryan-Collins & Van Lerven, 2017). Climate change causes, as discussed before, not only problems from a social view, but also from an economical view. In the long-term, not only the physical world, but also the financial world will be affected. The banking system of modern economies generates between 85 and 97 percent of the total money supply. Banks generate new money and purchasing power through lending. Their lending decisions have a major impact on the long-term path of the economy. Since central banks are institutions owned by the public, they should act on the behalf of the public and bolster the long-term public good. Climate action is a part of this long-term public good (Ryan-Collins & Van Lerven, 2017).

16 “Central bank responsibilities have always been focused on the economic context and challenges at hand.

Climate change is one of the greatest and most urgent challenges facing modern economies. It should be integral to central bank policy agendas, even aside from the legal obligations facing all signatories to the

Paris Agreement.” (Ryan-Collins & Van Lerven, 2017, p. 4)

Considering the large amount of investments needed for the transition to a low-carbon energy system and economy, applying green criteria to the CSPP of the ECB seems to be an appropriate and necessary approach to finance and support greener alternatives (Ryan-Collins & Van Lerven, 2017).

3.4 Distributional Effects

The fourth argument is about the redistribution of wealth and income caused by the CSPP. In the short-term, monetary policy can cause both positive and negative distributional effects through financial channels. In case of the APP, the change in the asset prices “redistributes wealth and income among different economies, sectors and households.” (Draghi, 2016).

As mentioned before in section 2.4, the current position of the ECB in the CSPP does not appear to be neutral. The CSPP could have a positive redistribution effect on the carbon-intensive sectors, since more than half of the purchases occur in carbon-intensive sectors. Research shows that this unequal distribution, partly due to imperfect transmission, has a larger, positive, impact on the bought-up assets compared with other assets (Matikainen, Campiglio , & Zenghelis, 2017). This skewed distribution can be linked to the first two arguments in favor of applying green criteria, since stranded assets and market failure are party caused by this skewed distribution. It can be argued that a skewed distribution towards green instruments is needed to achieve the transition to a low-carbon energy system. However, this argument argues for achieving a distribution that is representative of the ‘real’ economy instead of a distribution skewed towards carbon-intensive sectors by applying green criteria to the CSPP of the ECB.

4. THE CASE AGAINST THE INCORPORATION OF CLIMATE ACTION

This section will mention three arguments against the incorporation of climate action in the CSPP: - Required Involved Companies

- A Central Bank is not the Appropriate Entity - Slow Transition

4.1 Required Involved Companies

The first argument will examine whether certain companies are required to ensure the success of the CSPP. The seven eligibility conditions are probably not formulated without reason. As explained before in section 2.2, the main purpose of QE is to boost the whole economy: higher asset prices would cause a decrease in the cost of borrowing and an increase in consumption and investments. Besides that, higher asset prices are beneficial for the holders of these assets (Benford, et al., 2009).

Based on the current criteria, around 1100 of the euro denominated bonds worldwide are eligible. Besides the eligibility criteria, there are two purchase limits based on the relative market capitalization26 _{of a certain}

issuer group. The first is an issue limit of 70 percent per ISIN based on the outstanding amount. The second

26 _{The market capitalization is the total market value of a company’s outstanding shares expressed in the currency in which the} shares are issued (Berk & DeMarzo, 2014)

17 is a maximum purchase level for instruments a certain issuer group27 _{(Macchiarelli, Monti, & Vedolin, 2017).}

These restrictions should ensure that the total set of bonds purchased is heterogeneous in terms of sector, authority, credit quality, and issuer. Based on these criteria and limits, 11 percent of the holdings is AA, 37 percent A, and 52 percent BBB rated (Macchiarelli, Monti, & Vedolin, 2017).

Section 3.1 discussed that these ratings do not include the risk that assets would be stranded. However, this argument ignored the fact that even though these risks are included, green companies have a less attractive risk and return profile. Great uncertainty and the dependence on public support and interest, lead to an unappealing risk and lower ratings. As a result, combined with the recent economic crisis, both investors and central banks tend to invest in financial assets with high ratings (Campiglio, 2016). Besides, referring to section 3.2, the addition of green criteria can cause a bias towards green investments, which might result in a ‘green bubble’ instead of a carbon-bubble. A green bubble could cause the wrong pricing of green assets (Matikainen, Campiglio , & Zenghelis, 2017).

The existing criteria are meant to ensure that the portfolio of purchased assets has a low risk and a high rating. Adjusting or replacing existing criteria, in order to include more green instruments, could increase the overall risk and decrease the overall rating of the portfolio, considering the higher risk and uncertainty associated with green investments. Going back to the main purpose of the APP, price- and financial stability, it can be said that green criteria will not improve the CSPP, because high ratings and low risk are important for the success of the CSPP.

4.2 A Central Bank is not the Appropriate Entity

The second argument will discuss if a central bank like the ECB is the suitable entity to implement a green version of QE that includes climate action. The first question that is often dealt with, is whether taking action to improve climate falls under the mandate of the ECB. This is a more legal than economic issue, but since it is a relevant issue, it will be briefly discussed. The main goal of the ECB is providing financial stability. Even though climate change has a, by research proven, impact on financial stability, specific tasks related to the environment do not fall under the mandate of the ECB. When financial stability is threatened, the causes of this fall automatically under the mandate and no additional environmental goals must be added. There are concerns that when additional goals are added, these would conflict with the main goal of the ECB (The United Nations Environment Inquiry, 2017). Besides, an institution like the ECB can only be as independent as it is when it is undemocratic. Within democratic Europe, an undemocratic institution is only accepted if the mandate is limited, as mentioned in section 2.1.

The second question that often comes up, is whether another entity, for example the government, cannot carry out green QE. In the case of the interest rate policy, the central bank has a monopoly. Central banks have the sole power to change the interest rate. This in contrast to the balance sheet policy. If democratically elected governments can also carry out this task, why should it be carried out by the central bank, which has a limited mandate? Could the QE program, which is a form of balance sheet policy, be ‘taken over’ by an authority that can exert influence concerning climate action (Transparency International

27 _{The ECB distinguishes ten different issuer groups: central banks, central governments, public corporations, corporates and other} issuers, credit institutions, regional/local governments, supranational issuers, agencies (non-credit institution), agencies (credit institutions) and financial corporations that are not credit institutions (The European Central Bank, Eligible Assets Abbreviations, 2016).

18 EU, 2017). Borio and Disyatat (2009) claim that the specialness of the central bank is lost within the QE program and when this specialness is lost, another entity should carry out climate-related tasks.

Thus, given the two points mentioned, it can be said that the ECB is not suitable for adding green criteria to the QE program. It is not covered by the mandate of the ECB and it might also be executed by other entities.

4.3 Slow Transition

The third argument is concerns the required slow transition. Suddenly applying green criteria to the QE program could mean a rapid transition. Abruptly excluding ‘brown’, carbon-intensive, financial assets from the program would cause a direct transformation of at least the program. The current economy is 'brown’ and change is needed to make it 'green', but at present time, fossil fuel is still responsible for most of the energy supply. A general challenge is that the movement towards greener energy supplies requires investors providing large capital to energy technologies. Since large capital requires long time horizons, new technologies: “may face barriers to entry if investors and users are not confident that needed policy and market support will be reliable.” (IPCC, 2014, p. 120).A well and carefully implemented transformation is needed to pave the way for these greener technologies. Because of the implications involved in the transition and the current dependence on fossil fuels, this transition will have to take place slowly.

Additionally, applying green criteria could lead to the exclusion of ‘brown’ companies, also called ‘worst-in-class’ exclusion (Henke, 2016). It is unrealistic to exclude brown companies from the program when the world itself is still brown. Besides, referring to the preference of a neutral CSPP, excluding brown bonds will result in a bias towards green bonds, instead of a neutral position. Within the framework of this argument, it might be interesting to investigate the effect of excluding these brown companies from the CSPP. Does it create incentive to conduct research on sustainability within companies? Does the exclusion of brown companies ensure commitment in the pursuit of becoming greener and more sustainable?

5. ALTERNATIVES WITHIN CENTRAL BANKS

A first alternative within the central bank to promote climate change, is the use of green reserve requirements. The amount of required reserves is the share of deposits a commercial bank must keep as reserve at the central bank (Mishkin, Matthews, & Giuliodori, 2013). One way to use these required reserves, is to let the level depend on the relative share of green loans compared with brown loans issued by a commercial bank. This can be done by setting higher requirements when the ‘brown’ share is relatively larger or lower requirements when the ‘green’ share is larger. The second method has been used before by the central bank of Lebanon. If the client of a commercial bank in Lebanon is able to provide a certain certificate to prove the ‘greenness’ of the project or investment, the reserve requirement lowers by 100 to 150 percent of the value of the specific loan (The United Nations Environment Inquiry, 2017).

Another alternative is to lower the lending rate for commercial banks when they borrow from the central bank when commercial banks issue relatively more green loans. This would stimulate lending with green purposes, since the costs are lower. The more commercial banks lend to green entities, the lower the interest rate becomes (Ryan-Collins & Van Lerven, 2017).

A third alternative is comparable with the differentiated reserve requirements, namely differentiated capital requirements. The aim of capital requirements is to reduce moral hazard. When companies holding large amounts of equity capital fail, they lose relatively more than when the amount of equity is lower,

19 which creates a more risk averse attitude. The amount of capital required is recorded in the Basel Accord, which requires banks to keep at least eight percent of their risk-weighted assets as capital (Mishkin, Matthews, & Giuliodori, 2013). A form of green differentiated capital requirements might be lower capital requirements for green assets to stimulate green investments. The alternative is higher capital requirements for brown assets to discourage brown investments (High-Level Expert Group, 2018):

“A ‘brown-penalizing’ factor, raising capital requirements towards sectors with strong sustainability risks, would yield a constellation in which risk and policy considerations go in the same direction. Moreover, it

would be more focused and easier to rationalize as capturing the risk of sudden value losses due to ‘stranded assets’.” (High-Level Expert Group, 2018, p. 32)

All three mentioned alternatives require clear guidelines on whether something is green or not and what the corresponding ‘reward’ is. To what extend should an investment be green in order to benefit from more attractive conditions? Besides, these alternatives may stimulate lending to green companies and projects, but they discourage lending to brown institutions. Since, as mentioned before, the world is still brown, lending will be discouraged in general and the total number of investments might decrease. Moreover, since green projects are often riskier, the loans to green projects involve more risk. Setting lower requirements for commercial banks that issue more risky loans is not reasonable.

Less technical and restricting forms of promoting green investment are green recommendations and putting the environment on the agenda by, for example, climate targets (The United Nations Environment Inquiry, 2017). This does not impose any legal restrictions, like the other alternatives, but might inspire banks and other companies to work on the set climate targets and to conduct more climate related research.

6. CONCLUSION

The start of the Corporate Sector Purchase Program in 2016 raised many questions regarding the companies involved in the program and the distribution of the assets being purchased. The asset purchase of non-bank companies might, among other things, create an unequal distribution in favor of certain sectors of which relatively more assets have been purchased. When applied to climate change, the sectors can be divided in two groups: carbon-intensive and green. It is clear to most that a transition is needed to a low-carbon energy economy to combat climate change, but the question is how? This paper discusses the possibility of making the CSPP more sustainable by adding green criteria to the current list of eligibility criteria. This is done by discussing and explaining both the direct and indirect effects of climate change on the world in general and more specifically, on the financial world.

The main goal of the ECB is to maintain price stability. This means keeping inflation close to but not higher than two percent. This is therefore the main purpose of the APP and the CSPP. The first argument in favor of adding green criteria to the CSPP is that ignoring climate change will cause stranded assets. The second argument is that a lack of market efficiency, related to climate change, causes market failure. However, an argument against adding green criteria is that if stranded assets and market failure do not jeopardize price stability, adding green criteria is not covered by the mandate of the ECB. Otherwise, if it does influence the price stability directly, it will automatically fall under the mandate.

A third argument in favor of adding green criteria is based on the current skewed distribution towards the instruments of carbon-intensive companies. Adding green criteria could make this allocation of assets

20 neutral, as the ECB claims to pursue. On the other hand, a second counter argument is that adding green criteria or excluding instruments of ‘brown’ companies might cause relative bias towards the purchase of green instruments. The effect of this bias is uncertain, due to the lack on research and knowledge about the impact of this skewed distribution towards green instruments.

A third argument against is that green instruments entail higher risk and more uncertainty. This is part of the reason that most green instruments are not eligible according to the existing criteria. To make the CSPP greener, criteria will have to be replaced or adjusted, which may not benefit the success of the CSPP. The last argument in favor of adding green criteria concerns the indispensability of the ECB in tackling climate change. Given the urgency of the current climate situation and the size of the possible influence the ECB can exert, it is advisable to conduct more research on both green and brown financial instruments and their impact on the financial market, despite the disadvantages named and the contradictory mandate. A green version of the CSPP might not be the ideal solution, but when implemented in the appropriate way and applied to the purchases where possible, it might have a positive effect and send out a signal. To apply it correctly and efficiently, the current criteria must be considered carefully. Which criteria can be replaced or modified and how many and what kind of instruments will remain as a result?

“The way forward requires a blend of economics, political science, and

social psychology—smart solutions to tackle political economy constraints,

overcome deeply entrenched behaviors and social norms, and develop the

21

REFERENCES

ABInBev. (2017). Annual Report. ABInBev. Retrieved from http://annualreport.ab-inbev.com/downloads/ABI-Annual-Report-2017.pdf

Autostrade per l'Italia. (2017). Annual Report. Autostrade per l'Italia. Retrieved from

https://www.autostrade.it/documents/10279/4408513/Annual_Report_ASPI_2017_Eng.pdf Battiston, S., Mandel, A., Monasterolo, I., Schütze, F., & Visentin, G. (2017, March 27). A climate

stress-test of the financial system. Nature Climate Change, 7, 283-288.

Benford, J., Berry, S., Nikolov, K., Young, Chris, & Robson, M. (2009). Quantitative Easing. Bank of England:

Quarterly Bulletin, 49(2), 90-100.

Berk, J., & DeMarzo, P. (2014). Corporate Finance. Harlow: Pearson Education Limited.

Bernard, L., & Semmler, W. (2015). The Oxford Handbook of the Macroeconomics of Global Warming. Oxford: Oxford University Press.

BMW Group. (2017). Sustainable Value Report. BMW Group. Retrieved from

https://www.bmwgroup.com/content/dam/bmw-group- websites/bmwgroup_com/ir/downloads/en/2017/BMW-Group-SustainableValueReport-2017--EN.pdf

Borio, C., & Disyatat, P. (2009, November). Unconventional monetary policies: an appraisal . Retrieved from Bank for International Settlements: https://www.bis.org/publ/work292.pdf

Brander, M., & Davis, G. (2012). Greenhouse Gases, CO2, CO2e, and Carbon: What Do All These Terms

Mean? Ecometrica. Retrieved from

https://ecometrica.com/assets/GHGs-CO2-CO2e-and-Carbon-What-Do-These-Mean-v2.1.pdf

Caldecott, B., Kruitwagen, L., Dericks, G., Tulloch, D. J., Kok, I., & Mitchell, J. (2016, January). Stranded

Assets and Thermal Coal: An analysis of environment-related risk exposure. Retrieved from Smith

School of Enterprise (SSEE): www.smithschool.ox.ac.uk/research/sustainable-finance/publications/satc.pdf

Campiglio, E. (2016). Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy. Ecological Economics, 121, 220 - 230.

CBS. (2018, March 9). Emissions of greenhouse gases according to IPCC guide-lines. Retrieved from CBS StatLine: https://opendata.cbs.nl/statline/#/CBS/en/dataset/70946eng/table?dl=BADE

Coxhead, I. (2007). Reviewed Work: Natural Resources and Economic Development by Edward B. Barbier.

Land Economics, 83, 104-107.

Danone. (2017). Climate. Retrieved from Danone: http://www.danone.com/en/for-all/sustainability/better-world/climate/

De Nederlandsche Bank. (2018). Supervisory Strategy 2018 - 2022. Retrieved from https://www.dnb.nl/en/binaries/DNB_Visie%20op%20Toezicht_ENG_tcm47-366240.pdf?2017120508

22 Deutsche Bahn. (2017). Integrated Report. Deutsche Bahn. Retrieved from

https://www1.deutschebahn.com/resource/blob/1639240/4bcaf98f54cf3ba4c84c83d4e0aea926 /ib2017_dbkonzern_en-data.pdf

Deutsche Telekom. (2017). The 2017 Financial Year. Deutsche Telekom. Retrieved from Telekom:

https://www.annualreport.telekom.com/site0218/fileadmin/GB17/EN/PDF/20180309_GB2017_E N_COMPLETE.pdf

Draghi, M. (2016, October 25). Stability, equity and monetary policy. Retrieved from European Central Bank: https://www.ecb.europa.eu/press/key/date/2016/html/sp161025.en.html

EDF. (2017). Doing Even More to Reduce Co2 Emissions. Retrieved from EDF: https://www.edf.fr/en/the- edf-group/our-commitments/corporate-social-responsibility/doing-even-more-to-reduce-co2-emissions

EDP. (2017). The Living Energy Book: Sustainability Report. EDP. Retrieved from https://www.edp.com/sites/default/files/portal.com/proposal_item_1_-_relatorio_de_sustentabilidade_2017_en_-_vf.pdf

Engie. (2017). A World of Energy. Engie. Retrieved from https://library.engie.com/media/fd3d5ef7-3158-4f6d-b5aa-81f899ed54f1/#v=Version1&l=en&p=0&lc=0

Eni. (2017). Integrated Annual Report. Eni. Retrieved from eni.com:

https://www.eni.com/docs/en_IT/enicom/publications-archive/publications/reports/rapporti-2017/Integrated-Annual-Report-2017.pdf

ESRB Advisory Scientific Committee. (2016). Too late, too sudden: Transition to a low-carbon economy

and systematic risk. European Systematic Risk Board (ESRB).

Fawley, B. W., & Neely, C. J. (2013, January/February). Four Stories of Quantitative Easing. Federal

Reserve Bank of St. Louis Review, 95(1), pp. 51-88.

Gas Natural Fenosa. (2017). Annual Report. Gas Natural Fenosa. Retrieved from

https://www.gasnaturalfenosa.com/en/files/DOC2_-_ENG_-_Financial_Information_Gas_Natural_SDG_2017.pdf

Henke, H.-M. (2016). The effect of social screening on bond mutual fun performance. Journal of Banking

& Finance, 67, 69-84.

High-Level Expert Group. (2018). Final report of the High-Level Expert Group on Sustainable Finance:

Financing a Sustainable European Economy. European Commission.

Iberdrola. (2017). Sustainability Report. Iberdrola. Retrieved from

https://www.iberdrola.com/wcorp/gc/prod/en_US/corporativos/docs/IA_SustainabilityReport17. pdf

IPCC. (2014). Climate Change 2014: Mitigation of Climate Change.

ISIN. (2018). Over Internation Securities Identification Number (ISIN). Retrieved from ISIN: http://www.isin.org/nl/isin/

23 Joyce, M., Lasaosa, A., Stevens, I., & Tong, M. (2010). The financial market impact of quantitative easing.

Bank of England.

Lewis, M., Voisin, S., Hazra, S., & Walker, R. (2014, April 24). Energy transition & climate change: Stranded

assets, fossilised revenues. Retrieved from Kepler Cheavreux:

https://www.keplercheuvreux.com/pdf/research/EG_EG_253208.pdf

Macchiarelli, C., Monti, M., & Vedolin, A. (2017). The corporate sector purchase programme (CSPP):

Effectiviness and challenges ahead. Brussels: European Parliament.

Mankiw, N. G. (2013). Macroeconomics (8 ed.). Basingstoke: Palgrave Macmillan.

Matikainen, S., Campiglio , E., & Zenghelis, D. (2017). The climate impact of quantitative easing. Grantham Research Institute.

McGlade, C., & Ekins, P. (2015, January 7). The geographical distribution of fossil fuels unused when limiting global warming to 2°C. Nature, 517, 187-190.

Mishkin, F. S., Matthews, K., & Giuliodori, M. (2013). The Economics of Money, Banking & Financial

Markets. Edinburgh: Pearson.

Orange. (2017). Greenhouse Gas Emissions: total transparency. Retrieved from Orange:

https://www.orange.com/en/Human-Inside/Corporate-responsibility/Environment/Folder/COP23/Greenhouse-Gas-Emissions-total-transparency Pearce, D. (2003). The Social Cost of Carbon and its Policy Implications. Oxford Review of Economic Policy,

19(3), 362-384.

Pindyck, R. S., & Rubinfeld, D. L. (2013). Microeconomics. New Jersey: Pearson Education Inc.

Regelink, M., Reinders, H., Vleeschhouwer, M., & van de Wiel, I. (2017). Waterproof? An exploration of

climate-related risks for the Dutch financial sector. De Nederlandsche Bank.

Ryan-Collins, J., & Van Lerven, F. (2017, September 7). Central Banks, Climate Change and the Transition

to a Low-Carbon Economy. Retrieved from New Economics Foundation:

http://neweconomics.org/2017/09/central-banks-climate-change/?_sf_s=central+banks Sanofi. (2017). Carbon Footprint: CO2 Emissions. Sanofi. Retrieved from

https://www.sanofi.com/media/Project/One-Sanofi-Web/sanofi-com/common/docs/download-center/Carbon_footprint_C02_emissions_Scope_1-2_May_2017.pdf

Shell. (2017). Sustainablility Report: Greenhouse gas emissions. Retrieved from Shell:

https://reports.shell.com/sustainability-report/2017/our-performance-and-data/emissions-and-flaring/greenhouse-gas-emissions.html

Snam. (2018). Climate Change. Retrieved from Snam:

http://www.snam.it/en/Sustainability/acting_for_the_environment/climate_change.html Tanaka, M., Batten, S., & Sowerbutts, R. (2016, May 20). Let’s talk about the weather: the impact of

24 https://www.bankofengland.co.uk/working-paper/2016/lets-talk-about-the-weather-the-impact-of-climate-change-on-central-banks

Telecom Italia. (2017). Sustainability Report. Telecom Italia. Retrieved from

http://www.telecomitalia.com/content/dam/telecomitalia/documents/Sostenibilita/it/Stakehold er/ambiente/Ambiente2017/AMBIENTE2017_ENG/Emissions_2017%20ENG.PDF

Telefonica Emisiones. (2017). Annual Report. Telefonica Emisiones. Retrieved from Telefonica Emisiones: https://www.telefonica.com/documents/162467/141705152/Consolidated_Annual_Accounts_20 17.pdf/25d733e0-b28b-52bc-3116-be72cb2e7034

TenneT. (2017). Integrated Annual Report. TenneT. Retrieved from

https://annualreport.tennet.eu/2017/annualreport/userfiles/pdf/TenneT-Integrated-Annual-Report-2017.pdf

The European Central Bank. (2009, July 13). The ECB's enhanced credit support. Retrieved from European Central Bank: https://www.ecb.europa.eu/press/key/date/2009/html/sp090713.en.html

The European Central Bank. (2015, January 22). What is the expanded asset purchase programme? Retrieved from European Central Bank: https://www.ecb.europa.eu/explainers/tell-me-more/html/asset-purchase.en.html

The European Central Bank. (2016, April 21). Eligible Assets Abbreviations. Retrieved from European Central Bank: https://mfi-assets.ecb.int/resultEa/abbreviations#page=3

The European Central Bank. (2017a, January 12). Why is the ECB independent? Retrieved from European Central Bank:

https://www.ecb.europa.eu/explainers/tell-me-more/html/ecb_independent.en.html

The European Central Bank. (2017b). The ECB's Corporate Sector Purchase Programme: Its Implementation and Impact. ECB Economic Bulletin(4), pp. 40-45.

The European Central Bank. (2018a). Asset purchase programmes. Retrieved from European Central Bank: https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html

The European Central Bank. (2018b). Key ECB Interest Rates. Retrieved from European Central Bank: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/inde x.en.html

The European Central Bank. (2018c, February 8). Corporate Sector Purchase Programme - Eligibility

Criteria. Retrieved from European Central Bank:

https://www.ecb.europa.eu/mopo/implement/omt/html/cspp-qa.en.html

The Governing Council of the European Central Bank. (2016). DECISION (EU) 2016/948 OF THE EUROPEAN

CENTRAL BANK of 1 June 2016 on the implementation of the corporate sector purchase programme (ECB/2016/16). The European Central Bank.

The United Nations Environment Inquiry. (2017). On the Role of Central Banks in Enhancing Green

Finance.

25 Transparency International EU. (2017). Two Sides of the Same Coin? Brussels: Transparency International

EU.

Unibail-Rodamco. (2016). Financial Report. Unibail-Rodamco. Retrieved from https://www.urw.com/-

/media/Corporate~o~Sites/UR-Corporate/Files/Homepage/Investors/Financial- information/Financial-Documents/Annual-reports/2016~o~-~o~Unibail-Rodamco~o~Annual~o~Report.ashx

Unilever. (2017). Our greenhouse gas footprint. Retrieved from Unilever:

https://www.unilever.com/sustainable-living/reducing-environmental-impact/greenhouse-gases/Our-greenhouse-gas-footprint/

United Nations. (2015). Transforming our world: the 2030 Agenda for Sustainable Development. van Lamoen, R., Mattheussens, S., & Droes, M. (2017). Quantitative Easing and Exuberance in

Government Bond Markets: Evidence from the ECB’s Expanded Asset Purchase Program.

Tinbergen Institute Discussion Paper.

Vonovia. (2017). At Home in the Neighborhood: Annual Report. Retrieved from Vonovia:

http://investoren.vonovia.de/download/companies/deutscheanningtonimmo/Annual%20Reports /DE000A1ML7J1-JA-2017-EQ-E-00.pdf

Yap, K. (2016, July 7). Corporate Europe Embraces Bonds as Yields Plunge to Record. Retrieved from Bloomberg: www.bloomberg.com/news/articles/2016-09-07/corporate-bond-sales-swell-in-europe-as-yields-slump-to-record