European Central Bank Accepts Sustainability-Linked Bonds as Collateral

Bank’s Move to Support Liquidity as New Market Develops.

Bonds with coupon structures linked to sustainability performance targets will become eligible as collateral for Eurosystem credit operations and for outright purchases for monetary policy purposes, provided they comply with all other eligibility criteria, the European Central Bank (ECB) has announced.

The coupons must be linked to a performance target referring to one or more of the environmental objectives set out in the EU Taxonomy Regulation and/or to one or more of the United Nations Sustainable Development Goals relating to climate change or environmental degradation. The announcement further broadens the universe of Eurosystem-eligible marketable assets and signals the Eurosystem’s support for innovation in the area of sustainable finance.

Non-marketable assets with comparable coupon structures are already eligible. The decision aligns the treatment of marketable and non-marketable collateral assets with such coupon structures.

The decision applies from 1 January 2021.

In June, the International Capital Markets Association (ICMA) launched its Sustainability Linked Bond Principles in June. Similar to green and social bonds, the principles set out a framework which ties the proceeds of bond issuance to pre-defined performance targets and timelines, but not necessarily to a ring-fenced project.

The principles were developed in respond to demand for bonds that can support an issuer’s overall sustainability strategy or transition to a sustainable business model, based on externally-verified sustainability performance targets aligned to established goals, such as those of the Paris Climate Agreement.

The ECB’s decision to accept sustainability-linked bonds as collateral and for monetary policy purchases is seen by market participants as a positive step, as it will help to support liquidity as the new market develops.

According to Moody’s, US$33 billion in social bonds were bought by investors in Q2 2020, double the total for the whole of 2019, while US$19 billion of sustainability bonds were issued, compared with US$48 billion in 2019.

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