Reducing Climate Transition Risk in Central Banks' Asset Purchasing Programs

Noname manuscript No. (will be inserted by the editor) Reducing Climate Transition Risk in Central Banks’ Asset Purchasing Programs Giacomo Bressan ·Irene Monasterolo · Stefano Battiston 20 January 2021 Abstract In this paper we analyse 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. 1 Introduction Climate change has been traditionally considered as an ethical issue for businesses and investors Scholtens [2006]; Kaesehage et al. [2019]. In this framing, the concern about economic activities that either negatively or positively imG. Bressan Vienna University of Economics and Business (WU) E-mail: gia- [email protected] I. Monasterolo Vienna University of Economics and Business (WU) E-mail: [email protected] S. Battiston University of Zurich and University Ca’ Foscari of E-mail: [email protected] Electronic copy available at: https://ssrn.com/abstract=3770192 2 Giacomo Bressan et al. pact on climate change is limited to those actors that are actively engaging with corporate social responsibility. More recently, while the analysis of investors’ exposure to climate-related financial risks has gained academics attention (Dietz et al. [2016]; Battiston et al. [2017]), climate change has been recognised by financial supervisors as a source of individual and systemic financial risk (NGFS [2019]; Bolton et al. [2020]). This latter framing makes the issue of engagement in climate change more general because an appropriate management of risk is of concern for all businesses and investors. The assessment of climate-related financial risks poses several challenges. One the one hand, information on Greenhouse Gas (GHG) emissions has been shown to be relevant for banks’ lending decisions Herbohn et al. [2019], as well as for investors’ risk adjusted returns Liesen et al. [2017]. On the other hand, the sustainability performance of an investment is highly sensitive to the type of indicators utilised Scholtens [2010]. In this regard, the question of whether and how investors can reconcile the objective of lowering their own exposure to climate-related financial risks with other objectives (e.g. climate impacts, or financial performance) has remained open. In this context, several central banks and international financial institutions have recognised the relevance of climate change for their financial stability mandate, including the European Central Bank1), and the International Monetary Fund 2. Nevertheless, central banks have not been able yet to assess their portfolio’s exposure to climate-related financial risks, in particular in the context of the asset purchasing programs, known as Quantitative Easing (QE) that they have been carrying out both in the aftermath of the 2008 financial crisis and in response to the 2020 COVID-19 pandemic. This is a main limitation because the QE programs have injected a massive amount of liquidity in the market. For instance, the ECB’s Pandemic Emergency Purchase Programme (PEPP) has a 1,850 billion Euro envelop.3 Our analysis aims to assess this research gap that has important implications for business ethics. The main research question we address in this paper, is whether and how a central bank can pursue the objective to decrease its exposure to climate-related financial risks in its asset purchase while meeting the criteria that define the eligible universe of assets. There is a debate on whether the ECB could go beyond the so-called principle of market neutrality (i.e. to follow an investment strategy that reflects the proportion of assets values in the market) in the context of climate change. The ECB itself has argued that ”market neutrality might be problematic as a benchmark given that the markets have failed to produce climate-efficient 1See Lagarde’s speech on Feb. 2020, https://www.ecb.europa.eu/press/key/date/2020/ html/ecb.sp200227_1~5eac0ce39a.en.html 2See Managing Director Georgieva statement in 2019 https://www.bloomberg.com/news/ articles/2019-10-16/imf-will-include-climate-in-country-analysis-georgieva-says 3see https://www.ecb.europa.eu/mopo/implement/pepp/html/index.en.html Electronic copy available at: https://ssrn.com/abstract=3770192 Reducing Climate Transition Risk in Central Banks’ Asset Purchasing Programs 3 outcomes”4. Further, the ECB’s President has stated that ”The European Central Bank must question whether mirroring the composition of the bond market in its asset purchases is appropriate in light of climate risks” 5). Cojoianu et al. [2020] find that the likelihood of a an energy company bond to be part of the PEPP increases with the GHG intensity of the issuer. The policy brief by Dafermos et al. [2020] finds that there is a carbon skew in the Corporate Sector Purchase Programme (CSPP) portfolio, and suggest two strategies in which carbon-intensive bonds are replaced with more climatefriendly bonds. Our paper complements these analyses that focus on GHG emissions, by bringing in the bond issuers’ technological profile. Indeed, while it has been increasingly recognized that GHG accounting faces some limitations Busch et al. [2020]; Berg et al. [2019], granular information on the technological profile of the issuer is considered as fundamental to assess the climate transition risk exposure of the activity (see e.g. PACTA tool6and Battiston et al. [2020]. Moreover, there is lack of clarity on exactly how the market neutrality principle constraints the ability of ECB to integrate climate risk in its unconventional monetary policies. Most importantly, it is still unclear if and under which conditions the ECB could reconcile, in its asset purchase, climate risk considerations with the market neutrality principle. We contribution to the research and policy debate as follows. We first define a strict principle of market neutrality, which requires to invest in corporate bonds proportionally to the amount outstanding security. This constraint adds up to the criteria that define the eligible bond universe (e.g. credit quality and residence of the issuer, maturity, etc.), and criteria regarding member states quotas. We demonstrate analytically that under a strict market neutrality principle, the ECB’s PEPP portfolio is completely determined and there is no room for rebalancing the portfolio in order to lower exposure to climate risk. This means that, if markets do not price climate transition risk, then it is not possible to reconcile the market neutrality principle with climate change considerations. Then, we define a weak market neutrality principle which requires to invest in corporate bonds proportionally to the amount outstanding by Climate Policy Relevant Sector (CPRS) Battiston et al. [2017]). This classification of economic activities overcomes some of the limitations of GHG accounting, it is fully compatible with the EU Taxonomy, it is immediately applicable by all investors because it is based on international standards and it covers both low carbon and high carbon activities Monasterolo [2020]. For its characteristics, it has been increasingly used by financial supervisors to assess investors’ ex4Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the European Sustainable Finance Summit, Frankfurt am Main, 28 September 2020, https://www.ecb. europa.eu/press/key/date/2020/html/ecb.sp200928_1~268b0b672f.en.html 5Speech by C. Lagarde at United Nations Environment Programme Finance Initiative event on Oct. 13 2020 https://www.bloomberg.com/news/articles/2020-10-14/ lagarde-says-ecb-needs-to-question-market-neutrality-on-climate 6https://2degrees-investing.org/resource/pacta/ Electronic copy available at: https://ssrn.com/abstract=3770192 4 Giacomo Bressan et al. posure to climate transition risk Battiston et al. [2020], EBA [2020], ESMA [2020]. We show analytically that under the weak neutrality principle, there is some room for rebalancing the ECB’s PEPP portfolio in order to lower its exposure to climate risk, while respecting all other criteria. Further, we develop an algorithm to produce, under the weak market neutrality principle, examples of ECB’s PEPP portfolios that are compliant with the eligibility criteria but, importantly, are less exposed to climate-related financial risk than the current one. In simple terms, the weak neutrality principle implies to invest proportionally to the outstanding amount of bonds issued by companies in a given CPRS but it leaves some room (under all other constraints) to increase the amounts invested in companies that are involved with less carbon intensive activities. This means for instance within the fossil sector to increase exposure to firms with higher share of gas relatively to coal in their production. Similarly, in the utility electricity sector, this means to increase the exposure to firm with higher share of renewable sources. In our analysis, under the weak neutrality principle, we find alternative eligible portfolios with a rebalancing of about 6% of the total portfolio value. While we focus our analysis on the ECB’s CSPP and PEPP, the methodology that we develop and some of the results can be extended to other central banks worldwide. The structure of the paper is as follows. We first describe the criteria of asset purchase programmes (Section 2. We proceed by describing the notion of climate transition risk (Section 3. We then derive the main analytical results under the notions of strong and weak market neutrality. Further, we report the results on the construction of alternative portfolios with lower level of risk (Section 5). Finally we provide some concluding remarks (Section 6. 2 Asset purchase programme As an answer to the financial crisis first, and to the Covid-19 pandemic subsequently, the ECB has implemented multiple unconventional monetary policy operations. In the broader context of the so-called Asset Purchase Programme (APP), two specific measures have been directed to corporate debt: the Corporate Sector Purchase Programme (CSPP, 2016 onward) and the Pandemic Emergency Purchase Programme (PEPP, 2020 onward). Both programmes target corporate securities and share the same eligibility criteria as listed in Table 1 below.7 7See more details on eligibility criteria for CSPP at https://www.ecb.europa.eu/ mopo/implement/omt/html/cspp-qa.en.html and for PEPP at https://www.ecb.europa. eu/mopo/implement/pepp/html/pepp-qa.en.html. Electronic copy available at: https://ssrn.com/abstract=3770192 Reducing Climate Transition Risk in Central Banks’ Asset Purchasing Programs 5 Number Dimension Criteria 1Instruments All assets eligible under the APP are eligible under the PEPP; non-financial commercial paper is eligible since the PEPP inception for both the PEPP and CSPP 2Maturity Private securities shall have a minimum maturity of 28 days, if they had an initial maturity of 365/366; or, if the initial maturity was more than 367 days, a maturity from 6 months up to a maximum of 30 years 3Size requirements No minimum issue size requirement applies to bonds; commercial paper must have a minimum outstanding amount of 10 million AC 4Rating The first-best credit assessment for the issue, issuer or guarantor must be at minimum BBB-/Baa3 5Sector Private instruments must be issued by non-bank corporations 6Domicile The issuer must be incorporated in the euro area 7Country purchases Market capitalisation provides a weighting for each of the di↵erent jurisdictions of issuance within the benchmark. In the context of the internal benchmark, the “market capitalisation” of a given issuer refers to the nominal outstanding amount of eligible bonds issued by the issuer in question as a share of the entire CSPP-eligible universe. 8Issuer limit The Eurosystem applies additional limits per issuer group, following a pre-defined benchmark, reflecting all eligible outstanding issues. The pre-defined benchmark is defined by ”market capitalisation” as per criterium 7 above. 9Limited purchases The Eurosystem applies a maximum issue share limit of 70% per corporate bond on the basis of the outstanding amount. Table 1 Eligibility criteria for the CSPP/PEPP programs. 3 Climate transition risk Climate transition risk is understood here as the financial risk associated with the transition to a low-carbon economy Monasterolo and Battiston [2020]; Battiston et al. [2017]. In particular, central banks and financial supervisors are concerned by scenarios of disorderly low-carbon transition where climate policies are introduced late and investors cannot fully anticipate the policies’ impact on their business NGFS [2019]. In this context, we classify economic activities of firms that issue corporate bonds in the Euro Area according to the Climate Policy Relevant Sectors (CPRS) classification developed in 2017 by Battiston et al. [2017] to classify individual economic activities according to their climate financial risk exposure. These are defined as economic activities, identified at the NACE 4 digit level, that could be a↵ected positively or negatively (and potentially becoming “stranded assets”) in a disorderly transition. Thus, they are relevant for assessing climate transition risk. CPRS are provided at di↵erent level of granularity based on the energy technology used by the company’s activity. CPRS1 is the most aggregate one, yielding 6 sectors - i.e. fossil fuel, utility, energy intensive, buildings, transportation, agriculture. The CPRS2 allow us to extend the original clasElectronic copy available at: https://ssrn.com/abstract=3770192 6 Giacomo Bressan et al. sification by increasing the granularity of breakdown by energy technology in the high/low-carbon sectors (e.g. primary energy/fossil/oil, secondary energy/utility/wind, etc), and to allow correspondence with the EU Taxonomy for eligible sustainable activities. By increasing the granularity of some sectors (e.g. fossil fuels/coal, fossil fuels/oil, fossil fuels/gas), we obtain about 20 subsectors related to the main types of di↵erent technologies that are relevant for the low-carbon energy transition. The economic activities belonging to CPRS are identified considering three main criteria: –The direct and indirect contribution to GHG emissions; –The relevance for climate policy implementation (i.e. their costs sensitivity to climate policy change, e.g. the EU carbon leakage directive 2003/87/EC) –The activity’s role in the energy value chain. The CPRS allows to overcome the limits of pure classification of exposures based on GHG emissions and adds a climate risk connotation to the NACE 4-digit sector classification, which alone doesn’t provide any proxy of climate risk, it does not carry any information on the energy technology mix, nor on the relevance for climate policy implementation. In the following, we use CPRS1 to define one of the constraints for the portfolio construction and CPRS2 as one of the criteria over which we can lower the level of transition risk. 4 Strong and weak market neutrality Under the criteria defined in Table 1, which we will call strong market neutrality as in Definition 1, it is possible to show that the ECB’s portfolio is completely determined, i.e. the ECB has only one possible portfolio that respects all criteria. Hence, the ECB has no leeway to reduce its exposure to climate transition risk. The results are formalised in proposition 1. There was already an intuition for this result, but to our knowledge, it has not been formalised yet. By clarifying this issue, we help the research and policy debate to move forward. More in detail, the intuition of this result is as follows. We assume that bond issuers can be classified in terms of certain sectors of economic activities, indexed as Sbelonging to macro-sectors, indexed as MS. We further assume that it is possible to attribute to each issuer a level of climate transition risk, denoted as Qs. Later we will use CPRS1 and CPRS2 as a specific classification. However the result holds more in general. Based on the two above assumptions, we can then establish a partial order within the macro sector, i.e. it is possible to find sectors less exposed to climate transition risk than the others in the same macro sector. We define the risk for a portfolio Pthe weighted average of the variable Qs, denoted as QP. Then, given two portfolios P1and P2, obtained by changing the sectorial composition, it is possible to test which one has a lower exposure to climate transition risk, i.e. if QP1<Q P2. As it turns out, strong market neutrality implies that given the current ECB portfolio, there is no other feasible portfolio with lower transition risk. Electronic copy available at: https://ssrn.com/abstract=3770192 Reducing Climate Transition Risk in Central Banks’ Asset Purchasing Programs 7 Definition 1 (Strong market neutrality) We speak of strong market neutrality if criteria 1-9 as defined above simultaneously hold . Proposition 1 (Portfolio selection under strong market neutrality) Assuming that an investor respects all criteria under the assumption of strong market neutrality in 1, her portfolio is completely determined. Note that the proposition does not imply that all weights are fully determined, i.e. the ECB can still decide how much to invest in a specific issue, in the limits of criteria 7 to 8. Hence, discrepancies between the universe of eligible bonds and the actual ECB portfolio may exist, i.e. there could be bonds in principle eligible but not bought by the ECB. However, these discrepancies are marginal in volume and can be ultimately attributed to factors related to domicile, issue volume, liquidity or rating considerations. Also, the classification of issuers as public undertakings could imply limited deviations. Since the uniqueness result of Proposition 1 is determined by the definition of strong market neutrality, we introduce a weaker definition of market neutrality, as described in definition 2. The latter is based on the amount outstanding at the level of sectors as opposed to the the level securities as in Definition 1. For the purpose of this paper, we define sectors following the CPRS classification Battiston et al. [2017], as discussed in Section 3. More precisely, we will impose that the amount outstanding in each given CPRS1 sector is preserved, while the exposure to CPRS2 can vary, thus varying the exposure of the portfolio to transition risk. We demonstrate that under this weaker definition of market neutrality, the ECB can still comply with criteria 1-9 and, at the same time, reach a lower level of climate transition risk for its portfolio. Definition 2 (Weak market neutrality) We speak of weak market neutrality if criteria 1-7 and 9 as defined above simultaneously hold, while criterium 8 is substituted as follows: purchase must be proportional to the amount outstanding in each given macro-sector (CPRS1). Under this weaker definition of market neutrality, we can demonstrate that the climate transition risk of the portfolio can be reduced as formalised in Proposition 2 below. Proposition 2 (Portfolio selection under weak market neutrality) Assuming an investor follows the market neutrality as defined in 2, its portfolio can be rebalanced to reduce exposure to climate transition risk. 5 Alternative portfolios In this section, we show how the current ECB portfolio can be rebalanced to achieve a lower level of climate transition risk, under the weak market neutrality constraint defined in 2. Electronic copy available at: https://ssrn.com/abstract=3770192 8 Giacomo Bressan et al. 5.1 Data For the purposes of this study, we assume that the ECB portfolio respects the constraints as defined in 1, and hence it corresponds to the eligible universe of securities. We gather the bond portfolio as published from the ECB, consisting of 1’588 bonds, issued by 332 unique issuers, as of November 6th. The portfolio is purchased in the context of both the PEPP and CSPP, and has a total holding volume of 243’331 million AC at end of October 2020. For each bond we gather the following variables from Thomson Reuters Eikon: country of domicile, organization parent, NACE classification 4 digits, best-of issuer or issue rating, amount outstanding, green bond flag. Issuers are consolidated to the immediate parent where applicable, for example in the case of financial vehicles, in order to correctly assign the NACE sector and hence CPRS1 and CPRS2, following Table 2 above, to the bond. Weights in the ECB portfolio are assigned consistently with the amount outstanding. As additional measures of greenness, we use the variable “Exposure to New Energy” retrieved from Bloomberg New Energy Finance (BNEF), which we take as proxy of the share of revenue of the firm from low-carbon technology. We also retrieve from BNEF the the list of green energy projects in Europe and we derive a measure of greenness, with the following procedure: 1. The database of all renewable energy projects in Europe is gathered via BNEF. The covered variables of interest are owners, technology, date, project status, capacity and cost. We consider only non-decomissioned and non-abandoned projects from 2014 onward 2. Owners are consolidated to the first listed entity where available, or to the first non-government parent when unlisted 3. As some projects miss the value, cost curves are estimated at technology level using existing data for capacity and cost 4. Missing project values are filled using exponential or cubic interpolation 5. For each owner, CAPEX values are downloaded via Thomson Reuters Eikon 6. The greenness indicator is computed over 3-years rolling window from 2016 to 2019 as GIy=Py2,y1,y CAPEXGreen Py2,y1,y CAPEXAll The current composition of the ECB portfolio is described in Figure 1 below by CRPS1 and country of domicile. Figure 1 already shows some challenges for portfolio rebalancing. Indeed, the ECB cannot alter the country composition and must, under the weak market neutrality assumption, maintain the CPRS1 proportion constant. This implies that rebalancing will be possible for some countries, for a limited share of the portfolio weight. Despite this, we show that it is possible to still do a rebalance toward companies less exposed to climate transition risk as long as adequate measures of grenness are defined. In the context of this paper, we use three measures, depending on the CPRS considered: –CPRS2, where it is possible to determine a granualr energy technology profile and thus a ranking of exposure climate transition risk; Electronic copy available at: https://ssrn.com/abstract=3770192 Reducing Climate Transition Risk in Central Banks’ Asset Purchasing Programs 9 AT BE DE EE ES FI FR IE IT LT LU NL PT SK Country of domicile 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Share of companies by CPRS1 1-fossil-fuel 2-utility 3-energy-intensive 4-buildings 5-transportation 7-finance 9-other Fig. 1 Exposure of the ECB portfolio by country of domicile and CPRS2, after reclassification, as of November 6th –The computed capex greenness indicator for utilities; –BNEF’s ”Exposure to new energy: when it’s not possible to use either approach. . 5.2 Portfolio climate transition risk As defined in Section 2, climate transition risk is defined as Qsand depends on the sector Sin analysis. Since it is possible to establish, within a certain macro sector MS an order of climate transition risk such that QS1<...<Q Sn,it is hence possible to achieve a situation where, for two portfolios P1and P2, it holds that QP1<Q P2. As mentioned in Definition 2, we define sectors and macro sectors according to CPRS1 and CPRS2 as in Battiston et al. [2017] and Battiston et al. [2020]. Where this is not possible, we apply further greenness variables to define a relative order of exposure to climate transition risk. The summary of ranking criteria is provided in Table 2 below for each CPRS1: Hence, following the approach in Table 2, we assume that a portfolio more skewed toward gas, rather than oil, is less exposed to climate transition risk. Hence, an investor willing to reduce her climate transition risk, still maintaining a constant exposure at the CPRS1 level, can move weight from oil to gas in order to reduce it. Electronic copy available at: https://ssrn.com/abstract=3770192 16 Giacomo Bressan et al. The investor’s portfolio has a total known amount Dto be invested in the market according to criteria 1-9 above. While criteria 1-6 determine the eligible universe, criteria 7-9 determine the weight limits and principles of the allocation. We can say that the total amount to be invested will be allocated according to a certain set of weights wisatisfying: wi=xi D(6) where xirepresents the position (amount invested) in a given bond i,andwiis the corresponding weight in the portfolio - which we know is capped by a certain parameter ↵ according to criterium 9 above. Clearly, it holds that Piwi=1andPixi=D. As for the market, the sector distribution of the portfolio can be defined as SD SDs=X j21{nj2S} wjD, (7) leading to the following vector of sector level exposures: SD=[SD1;SD2;...;SDS].(8) The strong market neutrality hypothesis as described in Proposition 1 above implies purchases proportional to a certain benchmark, whose composition is determined by market capitalization, i.e. wj=bj Pjbj (9) Where the numerator captures all bonds issued by a certain company in the market, and the denominator captures all bonds in the market. We now want to show that, following this rule, a proportional relation between SDand SUis implied, hence proving the Proposition. First, we substitute wjin Equation 7 following the proportionality as in Equation 9 to obtain: SDs=X {j2s} bj Pjbj D where Dand Pjbj=Bare independent on the sector and can hence be taken out of the equation to obtain: SDs=D BX {j2s} bj(10) Where the last term in the equation is exactly SUs, implying a proportional relation which cannot be avoided as long as Equation 9 holds. Moreover, from the above it follows also from the definition in Equation 5 that QD= QU, i.e. the investor cannot influence its climate transition risk profile. Proof of Proposition 2 We move in the same economy and bond market described in the proof of Proposition 1 above, i.e. we suppose equations 1 to 8 still holds. For the definition of weak market neutrality, Equation 9 does not hold anymore as the purchases are not proportional to issuers but rather to macro-sectors which were initially defined as MS. Hence, we first define components of MSUand MSDin terms of the sectors: MSDm=X s2m SDs,(11a) MSUm=X s2m SUs.(11b) Electronic copy available at: https://ssrn.com/abstract=3770192 Reducing Climate Transition Risk in Central Banks’ Asset Purchasing Programs 17 Which yields to the following vector definitions for MSDand MSU: MSD=[MSD1;MSD2;...;MSDM],(12a) MSU=[MSU1;MSU2;...;MSUM].(12b) Following the definition of weak market neutrality, we know the following equation holds for the macro-sector level, replacing Equation 8: MSDm=D BMSUm,(13) and by expressing the macro-sectors in terms of their components we obtain: MSDm=X j2m wjD, (14) MSUm=X j2m bj(15) by substituting we obtain: X j2m wjD=D BX j2m bj.(16) Implying that weights wjare now free to move, as long as the total weight allocated to a certain macro-sector is constant. This implies that the investor can change its allocation across sectors and hence across issuers, without necessary mimicking the exact structure of the market benchmark but just its macro-sectorial composition - hence, yielding the proof. Moreover, it is possible to find a portfolio that has less climate transition risk, i.e. for which it holds QD<Q M. Indeed, given equations (1a)-(1d), it is possible to achieve a weight combination under which it simultaneously hold: QMS1,D <Q MS1,M (17a) ... (17b) QMSN,D <Q MSN,M (17c) Electronic copy available at: https://ssrn.com/abstract=3770192 18 Giacomo Bressan et al. References Battiston, S., Guth, M., Monasterolo, I., Neudorfer, B., and Pointner, W. (2020). Austrian banks’ exposure to climate-related transition risk. Austrian National Bank Financial Stability Report, 40:31–44. Battiston, S., Mandel, A., Monasterolo, I., Sch¨utze, F., and Visentin, G. (2017). A Climate stress-test of the financial system. Nature Climate Change, 7(4):283–288. Berg, F., Kölbel, J., and Rigobon, R. (2019). Aggregate Confusion: The Divergence of ESG Ratings. SSRN Electronic Journal. Bolton, P., Despres -Luiz, M., Pereira, A., Silva, D. A., Samama -, F., and Svartzman, R. (2020). The green swan - Central banking and financial stability in the age of climate change. Busch, T., Johnson, M., and Pioch, T. (2020). Corporate carbon performance data: Quo vadis? Journal of Industrial Ecology, page jiec.13008. Cojoianu, T. F., Collins, E., Hoepner, A. G. F., Magill, D., O’Neill, T., and Schneider, F. I. (2020). In the Name of COVID-19: Is the ECB Fuelling the Climate Crisis? Environmental and Resource Economics, (0123456789). Dafermos, Y., Gabor, D., Nikolaidi, M., Adam, P., and Van Lerven, F. (2020). Decarbonising is easy. 44(1055254). Dietz, S., Bower, A., Dixon, C., and Gradwell, P. (2016). Climate value at risk of global financial assets. Nature Climate Change, Letter, 6:676–679. EBA (2020). EBA - European Banking Authority - Risk assessment of the European banking system - Dec. 2020. ESMA (2020). ESMA - Consultation Paper Draft advice to European Commission under Article 8 of the Taxonomy Regulation. Herbohn, K., Gao, R., and Clarkson, P. (2019). Evidence on Whether Banks Consider Carbon Risk in Their Lending Decisions. Journal of Business Ethics, 158(1):155–175. Kaesehage, K., Leyshon, M., Ferns, G., and Leyshon, C. (2019). Seriously Personal: The Reasons that Motivate Entrepreneurs to Address Climate Change. Journal of Business Ethics, 157(4):1091–1109. Liesen, A., Figge, F., Hoepner, A., and Patten, D. M. (2017). Climate Change and Asset Prices: Are Corporate Carbon Disclosure and Performance Priced Appropriately? Journal of Business Finance & Accounting, 44(1-2):35–62. Monasterolo, I. (2020). Embedding finance in the macroeconomics of climate change: research challenges and opportunities ahead. CESifo Working Paper,, 21(4):25–32. Monasterolo, I. and Battiston, S. (2020). Assessing Forward-Looking Climate Risks in Financial Portfolios: A Science-Based Approach for Investors and Supervisors. In NGFS Occasional paper. Case Studies of Environmental Risk Analysis Methodologies.,pages 52–72. NGFS (2019). NGFS - A call for action Climate change as a source of financial risk. First comprehensive report. Scholtens, B. (2006). Finance as a driver of corporate social responsibility. Journal of Business Ethics, 68(1):19–33. Scholtens, B. (2010). The environmental performance of Dutch government bond funds. Journal of Business Ethics, 92(1):117–130. Electronic copy available at: https://ssrn.com/abstract=3770192