(Bloomberg) -- The European Central Bank signaled it may take action against companies that don’t deliver on climate pledges, as part of its plan to make its monetary policy greener.

The ECB’s Governing Council will set interim emission-reduction targets for the corporate portfolios of its asset and pandemic emergency purchase programs, according to a new climate report released on Tuesday. These will be set using the requirements of the EU’s climate benchmarks legislation as a guide, including a mandatory 7% annual decline in emissions.

The ECB is taking a more activist role in addressing climate change than other major central banks such as the Federal Reserve. It announced plans in 2022 to adjust its corporate bond portfolio to favor issuers that pollute less, marking a significant shift to weave environmental considerations into monetary policy. 

For now, the ECB’s announced targets will be used to track progress in meeting portfolio goals, it said. Potential “remedial actions” will be considered “on a case-by-case basis” if the ECB identifies “deviations from the desired trajectory” for the portfolios.

“To reduce the carbon footprint of our portfolio, in particular for public-sector assets, we depend on issuers delivering on commitments to lower their associated emissions,” ECB President Christine Lagarde said in a statement. “Ultimately, action needs to be taken at issuer level for the economy to decarbonize.”

In addition to setting targets, the ECB has also expanded the scope of assets that are subject to a climate review, from €395 billion in last year’s assessment to €4.5 trillion in Tuesday’s report. That includes holdings of public sector assets and covered bonds, as well as foreign reserves, in addition to the corporate sector assets that were in focus last year.

“We now disclose climate-related information for over 99% of the Eurosystem’s assets held for monetary policy purposes under the asset purchase program and the pandemic emergency purchase program,” Lagarde said. And available data “point toward a gradual reduction in emissions for these investment classes.”

Corporate assets’ weighted-average carbon intensity (which measures emissions relative to revenue) declined 50% from 2018 to 2022, according to the ECB’s assessment of its holdings. Other assets saw declines of 15% to 63% in emissions from own operations and power usage. The data excluded value chain emissions, known as Scope 3, which are among the most difficult to measure and for companies to cut.

“Issuers in aggregate became more carbon-efficient owing to a combination of declining emissions and an increase in the respective normalization factors such as revenues,” according to the report. Rising prices also helped, the ECB said.

“Inflation had a positive impact on issuers’ carbon efficiency, which could lead to a downward bias of inflation-unadjusted metrics such as the WACI over time,” the ECB said. The bank said it will work with standard-setting bodies to address the lack of a methodology for accounting for inflation.




--With assistance from Alexander Weber.

(Updates to add more detail from climate report)

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