FRANKFURT (Reuters) - The European Central Bank will from next year accept as collateral green bonds with payouts linked to sustainability targets, and also include such debt in its asset purchase schemes, it said on Tuesday.
The announcement marks the first tangible step - albeit a small one - towards making the ECB's monetary policy greener, one of the key objectives set by Christine Lagarde when she took charge of the bank last year.
From Jan 1, banks will be allowed to post as collateral for ECB credit bonds that link their interest payments to compliance with the European Union's taxonomy regulation - its framework for sustainable investment - or one or more of the United Nations' sustainable development goals.
Those goals include fighting poverty as well as climate change.
"This further broadens the universe of Eurosystem-eligible marketable assets and signals the Eurosystem’s support for innovation in the area of sustainable finance," the ECB said.
It added the same class of bonds will also become eligible for the bank's asset purchase programmes, which cover both sovereign and corporate debt.
While the broad class of bonds labelled as green tie money raised to individual projects, sustainability-linked bonds are tied to specific social or environmental goals which, if not met, oblige companies to step up their interest payments.
Pioneered by Italian utility Enel (MI:ENEI) in 2019, such sustainability-linked bonds remain rare, and there are only four such issues currently in the market.
By contrast, around $90 billion worth of green bonds were issued in Europe in the first half of this year, 46% percent of the world's total, according to Refinitiv data.
EU rules define an economic activity as environmentally sustainable if it makes a "substantial contribution" to one of its six objective, which relate to climate change mitigation, protection of water, transition to a circular economy, pollution prevention and protection of biodiversity.