The composition of the ECB’s EUR386bn corporate bond portfolio is about to change. From next month, the legacy of the ECB’s corporate sector purchase programmes (CSPP & PEPP) will begin to have a distinct green tilt. As announced on 19 September, and with the aim of gradually decarbonising its corporate bond holdings, the ECB will become much more selective in how it reinvests the proceeds of the maturing corporate bonds (c.EUR2bn/month) it already owns.
In summary, the ECB’s bond reinvestment criteria to transform its holdings will depend on an in-house “climate score” with the goal of limiting the bank’s exposure to those bonds with a high carbon footprint. Note that each issuer’s overall “climate score” and ranking - undisclosed to the public - will be determined by the combination of three other sub-scores related to emissions and transparency: (i) its backward-looking emission sub-score; (ii) its forward-looking target sub-score; and (iii) its climate disclosure sub-score.
The total issuer climate scores will impact the weighting, and the way the reinvestment purchasing of corporate bonds is tilted. The basic mechanism is the higher the overall score of an issuer, the more bonds the ECB will purchase. The Eurosystem will also use the climate scores to adjusts bids in the primary market and to impose maturity limits on bonds from low-scoring issuers.
We recommend three trade ideas of issuers which offer attractive combination of wide spread levels and high ESG
scoring – bonds should be well positioned to attract ECB reinvestments:
Our trade ideas:
1. Buy EDPPL 1 5/8 EUR’26s at B+197.0 (3.85%)
2. Buy ENELIM 3 7/8 EUR’29s at B+270.0 (4.78%)
3. Switch out TELEFO 0.664 3 EUR’30s, into TELEFO 2.932 EUR’29s at B+189.0 (3.99%)