The European Central Bank's decision to make sustainability-linked bonds eligible as central bank collateral, and to consider including the bonds in asset purchase programs, has been welcomed by money managers.
The ECB is also considering making the bonds eligible for asset purchases and the coronavirus-related Pandemic Emergency Purchase Program.
Starting Jan. 1, the ECB will accept bonds that have coupon structures linked to environmental objectives or one or more of the United Nations' sustainable development goals related to climate change or environmental degradation, it said Tuesday.
"This further broadens the universe of Eurosystem-eligible marketable assets and signals the Eurosystem's support for innovation in the area of sustainable finance," the ECB said in a news release.
The move was welcomed by money managers.
"This statement from the ECB sends a very strong signal acknowledging its important role in addressing the climate crisis," said Mitch Reznick, head of sustainable fixed income at the international business of Federated Hermes, in a statement.
Sustainability-linked bonds had been excluded from being eligible for the ECB's asset purchase program "given their coupon payments are linked to a company achieving (key performance indicators) attached to sustainable objectives such as the SDGs," Mr. Reznick said.
However, Mr. Reznick said it is also important to note that the sustainability-linked bond market is a nascent one, although it is growing rapidly with a number of recent issuances.
"In taking this decision, the ECB shows that its unqualified support goes beyond the EU taxonomy (on sustainable finance), the SDGs and sustainable finance in general. Above all, it like us at Federated Hermes, believes that to address the climate crisis, companies can and must decarbonize their own processes of creating economic value. This can only happen at the company level, not just at the green-financed project level," Mr. Reznick said.