Reducing Climate Transition Risk in Central Banks’ Asset Purchasing Programs

18 Pages Posted: 12 Mar 2021

See all articles by Giacomo Bressan

Giacomo Bressan

WU Vienna University of Economics and Business

Irene Monasterolo

Utrecht University

Stefano Battiston

University of Zurich - Department Finance; Ca Foscari University of Venice

Date Written: January 20, 2021

Abstract

In this paper we analyze whether and how a central bank can pursue the objective to lower its exposure to climate-related financial risks in its asset purchase programs while meeting the criteria that define the eligible universe of assets, including market neutrality. Despite focusing on the analysis of European Central Bank (ECB)’s asset purchase program and its exposure to climate transition risk, our approach and results can be applied to other central banks. We first prove analytically that under a strict market neutrality principle, the ECB’s corporate bonds’ portfolio is completely determined and climate transition risk cannot be reduced. We then show that under a weaker market neutrality principle, it is possible to construct a portfolio with lower exposure to climate transition risk than the current one. We provide a simple algorithm to produce examples of such portfolios. Our results contribute to support central banks in the assessment of their exposure to climate-related financial risks, and in the introduction of climate change considerations in their assets purchase programs.

Keywords: central banks, market neutrality, asset purchase, climate transition risk, corporate bonds, portfolio's climate exposure

JEL Classification: E52, E58, G11

Suggested Citation

Bressan, Giacomo and Monasterolo, Irene and Battiston, Stefano, Reducing Climate Transition Risk in Central Banks’ Asset Purchasing Programs (January 20, 2021). Available at SSRN: https://ssrn.com/abstract=3770192 or http://dx.doi.org/10.2139/ssrn.3770192

Giacomo Bressan

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1, Building D1, 3rd Floor
Vienna, 1020
Austria

Irene Monasterolo (Contact Author)

Utrecht University ( email )

Vredenburg 138
Utrecht, 3511 BG
Netherlands

Stefano Battiston

University of Zurich - Department Finance ( email )

Plattenstrasse 32
Zürich, 8032
Switzerland

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

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