[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.

For an overview of environmental, social and governance investment principles, including negative screening practices, see Boffo, R. and Patalano, R. (2020), “ESG Investing: Practices, Progress and Challenges”, OECD, Paris. 39. See Schoenmaker, D. (2021), “Greening monetary policy”, Climate Policy, Vol. 21, No 4, January. 40. Although the ECB’s private sector asset portfolio is sizable relative to other central banks (the Bank of England’s CBPS portfolio currently totals approximately GBP 20 billion whereas the size of the ECB’s CSPP portfolio amounts to EUR 278 billion at amortised cost as at 4 June 2021), the ECB’s CSPP portfolio is far smaller than the PSPP portfolio, which stands at EUR 2.4 trillion at amortised cost as at 4 June 2021. 41. Evidence regarding the capacity of the market to correctly price green bonds is currently still mixed. Some papers point to the existence of a positive carbon premium whereby investors demand a compensation for holding securities issued by carbon-intensive companies. See, for example, Alessi, L., Ossola, E. and Panzica, R. (2019), “The Greenium matters: greenhouse gas emissions, environmental disclosures, and stock prices,” Working Papers in Economics and Finance, No 2019-12, Joint Research Centre, European Commission. However, when a premium exists, it seems to only reflect the transition policy risk. See Van der Ploeg, F. (2020). “Macro-financial implications of climate change and the carbon transition”. ECB. In addition, some other papers find either a negative premium or no or little premium. See, for example, Tang, D.Y. and Zhang, Y.