Understanding the use of unconventional monetary policy for portfolio decarbonisation in Europe

This study examines the European Central Bank's (ECB) use of unconventional monetary policy to decarbonise its balance sheet, focusing specifically on the inherent trade-offs between monetary stability and environmental sustainability. We investigate how the ECB's green asset purchases, as part of its Corporate Sector Purchase Programme (CSPP), affect the liquidity of its portfolio compared to similar assets not held by the ECB. While these assets align with green objectives, they exhibit significantly lower liquidity than their non-green counterparts. This discrepancy highlights a fundamental tension within the ECB's policy framework: the commitment to environmental sustainability may undermine liquidity and, by extension, the overall effectiveness of monetary policy. Our findings suggest that the ECB's strategy to integrate environmental considerations into its operations, though successful in supporting greener initiatives, poses challenges for maintaining strong liquidity levels. The study underscores the need for innovative financial instruments and strategies to reconcile the dual objectives of promoting environmental sustainability and ensuring monetary stability. • ECB's green asset purchases reduce portfolio liquidity, challenging monetary policy effectiveness. • Study reveals trade-off between ECB's environmental goals and liquidity in the corporate bond market. • ECB's green bond acquisitions lead to higher bid-ask spreads, indicating reduced market fluidity. • Findings underscore need for innovative strategies to balance financial stability with sustainable finance. • ECB's green bond strategy poses liquidity risks, complicating crisis response and policy maneuverability.