BoE corporate bond purchases given climate overhaul

The Bank of England (BoE) has set out changes to its £20bn corporate bond purchase scheme (CBPS) that it says will favour greener companies and incentivise climate-friendly behaviour.

Firms will have to meet certain criteria for their bonds to be eligible for inclusion in the programme, with coal companies set to be excluded altogether. Future purchases will be tilted towards stronger performers in their sectors and away from weaker ones, with the intensity of the BoE’s actions escalating over time.

This tilting approach will be informed by a scorecard assessing the emissions intensity of firms’ activities, their climate disclosures, whether they have a target to cut emissions, and their past progress in doing so. All participants will have to meet minimum standards on climate governance and disclosure.

The BoE says it is required to make the move after chancellor Rishi Sunak updated its mandate to include supporting the transition to a net-zero economy.

Governor Andrew Bailey stressed that the BoE’s strategy was focused on incentivising good behaviour rather than immediate divestment. Fossil fuels companies outside of coal will not be automatically excluded, although they will be required to set clear emissions reductions targets.

“Our strategy in greening the CBPS is to help incentivise firms to put in place and adhere to credible plans for reducing their emissions,” he said. “We hope that being transparent about our approach will encourage and enable other investors to further develop strategies to green their portfolios.”

Lukasz Krebel, an economist at the New Economics Foundation, said the BoE’s decision would have “an important signalling effect for the market”, as companies eligible for central banks’ purchase programmes have been found to enjoy improved financing conditions.

He said the BoE’s use of a scorecard encompassing a range of measures would make it hard for companies to game the system, but expressed concern over its reliance on the weighted average carbon intensity (WACI) metric.

“While it makes it easier to account for firm size, it is not a metric that captures what is important for climate change – absolute emissions. It is even possible that firms’ WACI might decrease while its overall emissions increase.” he said.

He also criticised the lack of ambition in the BoE’s target to green its portfolio. “We’re in a climate emergency, and yet the bank’s path to reduce even [the WACI] measure is very slow: just by 25% by 2025.”

David Barmes, senior economist at Positive Money, shares Krebel’s concern over the lack of urgency in the BoE’s plans. “The bank will have a much stronger impact in guiding markets to net zero if it leads by example and proactively excludes from its portfolio companies deriving revenue from further expansion and exploration of fossil fuels,” he said.

The European Central Bank (ECB) has also said it will incorporate climate change criteria into its framework for corporate bond purchases, including ensuring that issuing companies are aligned with EU policies implementing the Paris climate agreement. Although the Federal Reserve has not bought corporate debt on the same scale as the ECB and BoE, it has faced calls from climate advocates to clarify the terms on which it would be willing to intervene in the future.