[36] This emission bias appears to be driven by firms’ underlying issuance behaviour: large firms in carbonintensive sectors are more likely to enter the bond market, which results in the ECB’s CSPP portfolio having a relatively high emission intensity. [37] In greening its asset portfolio, the ECB could pursue several alternative strategies. Some have argued that we should implement outright exclusion policies – also known as negative screening policies – by stopping purchases of bonds issued by polluting sectors. [38] Such policies have the drawback that they would eliminate incentives for firms in carbon-intensive sectors to reduce their greenhouse gas emissions. Another possibility would be to pursue a more sophisticated “tilting strategy” under which the ECB could adjust its monetary policy operations more gradually in line with sustainability considerations. [39] The operational implementation of such a tilting strategy also faces hurdles, for both our private and our public sector purchases. [40] For our private sector asset purchases, a tilting of the ECB’s purchases could, in principle, reduce potential mispricing. [41] Given the still nascent state of the green bond market, tilting towards this particular market may, however, adversely affect market liquidity or unduly influence the price discovery mechanism. Therefore, one could consider tilting strategies that also favour issuers that have a clear path and commitment to reducing their greenhouse gas emissions. Tilting strategies could be performed at the level of sectors, firms or bonds. Considering climate-related criteria in our public sector purchases poses even bigger challenges.

[28] Other central banks have followed similar principles to reduce price distortions from their asset purchases. [29] While the concept of market neutrality is related to the Treaty principle[30] of “an open market economy with free competition, favouring an efficient allocation of resources”, it is not per se a rule in primary law. The ECB already now deviates from market neutrality in several instances. For example, the application of eligibility criteria for purchases implies that the ECB’s bond holdings are not necessarily proportional to market capitalisation. [31] Furthermore, under the public sector purchase programme (PSPP) and the pandemic emergency purchase programme (PEPP), sovereign bond purchases are guided by the ECB’s capital key rather than market capitalisation. As I have argued before, the existence of climate externalities implies that we have to reconsider the notion of market neutrality. [32] In the presence of market failures, adhering to the market neutrality principle may reinforce pre-existing inefficiencies that give rise to a suboptimal allocation of resources. [33] The Treaty clearly stipulates that the ECB should pursue its mandate by favouring an efficient allocation of resources. [34] If the market misprices the risks associated with climate change, adhering to the market neutrality principle may instead support a market structure that hampers an efficient allocation of resources. In view of such market failures, it seems appropriate to replace the market neutrality principle by a market efficiency principle. Such a principle would explicitly recognise that a supposedly “neutral” market allocation may be suboptimal in the presence of externalities.