Bank of England launches consultation on greening monetary policy

The Bank of England (BoE) has launched a public consultation seeking feedback on a discussion paper outlining the tools available to reduce the carbon content of the bank’s Corporate Bond Purchase Scheme (CBPS) portfolio.

The consultation follows a recent Treasury revision of the BoE’s mandate to bring its operations in line with the UK government’s target of achieving a 78% reduction in greenhouse gas emissions by 2035 (compared to 1990 levels).

In a speech introducing the discussion paper and consultation process, BoE executive director Andrew Hauser said achieving net zero is a pressing global priority requiring action from everyone, including central banks.

“We believe it is possible to adjust the composition of our Corporate Bond Purchase Scheme to support net zero without compromising the scheme’s primary monetary policy purposes,” he told an audience at Bloomberg’s London office. “Doing so lies clearly within the [Monetary Policy Committee’s] revised remit, and can be justified by noting that current market prices do not yet fully reflect the inevitable increase in the shadow carbon price.”

Drawing heavily on thinking by non-profit, central bank and investor groups, the discussion document outlines three broad principles that will shape the bank’s approach to adjusting the CBPS. The primary goal is not simply to minimise the current carbon footprint of the scheme, but to improve companies’ incentives for making the necessary adjustments to hit net zero. The BoE will also “lead by example, learning from others”, and will ratchet up requirements over time.

The document also outlines four main policy tools the bank can use in this transition: carbon footprint targets; eligibility criteria; tilting purchases towards issuers with strong climate performance; and tightening and escalating requirements over time.

The CBPS portfolio currently stands at approximately £20bn (€23bn), or 6.5% of the sterling corporate bond market. Climate advocacy groups, who campaigned heavily for the revision of the bank’s mandate, have called for companies with fossil fuel expansion plans to be immediately excluded from bond purchases. They also warn about the use of carbon intensity as a measure of climate progress, demanding instead a trajectory of absolute emission reductions.

In addition, the SUERF network of central bankers, financial industry representatives and academics has released a policy note outlining ways in which the BoE can use its new mandate to decarbonise its operations.

Responding to the new proposals and consultation, Positive Money economist David Barmes warned the measures outlined would affect only a small amount of the hundreds of billions of pounds pouring into dirty activities every year.

“That’s why we also need to see plans on how the bank will green the rest of its monetary operations as well as its financial policies,” he said. “In order to meaningfully put its new mandate into practice, the bank must rapidly take measures to steer lending in a sustainable direction, by penalising dirty lending and incentivising green alternatives.”

The consultation will run until 2 July 2021. Debt issuers, investors, academics, advocacy groups and other interested parties are asked to respond online to a series of specific questions about each of the policy tools outlined in the discussion paper.