The behaviours of consumers and producers play a fundamental role in the transition towards a more sustainable economy – one that is more respectful of the environment, of communities, and of the needs of future generations. 

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Indeed, politicians, which have powerful tools such as tax relief or penalties, have the ability to encourage these behaviours. And not surprisingly, central banks are also able to influence these behaviours. The role that monetary authorities play within our economies has constantly grown in recent years, due to the quantitative easing policies that followed various crises. For instance, in 2011, the ratio between the central bank balance sheet and GDP was at 15% for the Fed and 20% for the ECB: today, these figures stand at 40% and 70%, respectively.

On this specific topic I would like to highlight a recent press release from the ECB, dated July 8. There are various points that, when combined, define a roadmap for the 2021-2024 period.

The ECB will incorporate climate change consideration into its monetary policy framework. Climate change has an impact on the main economic indicators: production, employment, productivity. All of these are strictly connected with inflation, and since the ECB’s actions are guided by a price stability target, these actions must consider environmental risks. The ECB’s research departments will develop their own macroeconomic models, in order to assess how climate change interferes with monetary policy transmission.

Moreover, the huge changes in the future energy production processes already affect the potential performance and risk of the assets held by the ECB (e.g., corporate bonds issued by utilities, mining and oil companies). So, as every professional fixed income portfolio manager does, the central bank needs to integrate ESG factors into its eligibility criteria. And the same concepts apply to collateral management, when the central bank provides liquidity to markets or institutions: the more “virtuous” the asset provided as a credit guarantee, the lower the discount applied by the ECB.

The central bank, within its activity of financial system supervision, will also provide guidelines to financial institutions to have a common and comparable set of indicators for risk assessment, reporting and disclosure in the field of environmental sustainability. We expect many other central banks to soon move in the same direction.

With this wide set of initiatives in place in the coming years, we also think that there will be a positive spill-over effect on the asset management industry. Since central banks are probably the most relevant player in the market today, bond issuance activities will be strongly guided by these eligibility criteria. As of today, looking through an ESG lens, we believe the equity world is the best place in terms of available opportunity set: investors have a broad equity investment universe with both generic ESG and SRI solutions, as well as products that target specific industry and themes with a very high sustainability profile and impact.

Central banks’ actions will undoubtedly enrich the sustainable fixed income investment universe too – especially in those segments with an intrinsic lower average ESG profile. For example, in the Emerging Market Debt and Global High Yield sectors, the current country and industry composition implies a relevant exposure to companies and governments with a medium-high sustainability risk. And as portfolio theory teaches us, the wider the opportunity set, the better the results for clients, investors… and the future of the planet!

“Review, recharge and restart”

Unicredit Wealth Management Monthly Outlook 
July 2021

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