Description
Are Central Bank’s monetary policies helping achieve a green transition? Central bank collateral frameworks can exert a systematic effect on market behavior by providing information on the institutions’ willingness to buy individual bonds from investors. While collateral frameworks have been subjected to some analysis, their relationship with sustainable finance has been overlooked. Here, I find evidence of an anti-green bias at the European Central Bank, whose collateral framework demands higher ‘haircuts’ in return for holding green bonds. I also show that the ECB collateral framework moves markets as the higher haircuts that the ECB imposes on green bonds negate the premium with which such debt instruments trade in the secondary market, translating into higher borrowing costs for green bond issuers and thus becoming an additional barrier to access new and additional finance that can help achieve a green transition. Given the ECB's commitment to ensure that all of its policies are aligned with the objectives of the Paris Agreement, it is important that its impact on green bonds and potentially other forms of sustainable finance be subjected to further review and analysis.
