Is the ECB monetary policy strategy review a catalyst towards a sustainable financial system? Evidence from market reactions

Abstract

This paper provides novel insights regarding the impact of ECB incorporating climate change in its Monetary Policy Strategy Review (July 2021) and of ECB announcing the tilting of its corporate bond purchases (July 2022) on financing conditions of eligible corporate bonds through the calculation of a Climate Change Score attributed at a firm level. The main purpose is to understand if the two ECB announcements helped in some degree as a catalyst to a decrease in carbon footprint and to an improvement of climate performance in the euro area. Using a difference-in-differences estimation, we compare the evolution of prices for eligible bonds issued by brown firms versus green firms and for eligible green bonds versus conventional bonds. By July 2021, we find that market participants believed that the ECB would continue to apply the market neutrality principle and that the climate incorporation into the monetary policy framework would be translated by an increase in the proportion of green bonds into its portfolio. On the contrary, by July 2022 the regression analysis suggest that participants understand that ECB tilting choice will depend on the issuer climate score rather than on the type of bond issued. However, there is no strong data that supports that market participants believe that ECB shift towards a market efficiency principle.

Date of Award	18 Oct 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)