A new report has cast doubt on the credibility of a key pillar of the Bank of England’s (BoE) climate agenda and called for a more ambitious approach.
Academics led by the New Economics Foundation found that despite the BoE’s pledge to favour greener companies in its £20bn corporate bond purchase scheme (CPBS), its plans will have only a negligible impact from a climate perspective. They say the scheme will continue to subsidise carbon intensive activities.
The BoE set out changes to the CPBS last year, saying it was required to do so after chancellor Rishi Sunak included support for the transition to a net-zero economy in its mandate. In a paper outlining its rationale for the changes, it acknowledged that the scheme had been reinforcing the market’s failure to accurately price climate risks.
Instead of excluding the most polluting companies from the programme, the BoE adopted an approach whereby purchases would be tilted towards stronger performers in their sector. Crucially, it opted not to alter the sectoral make-up of its purchases, for example by explicitly reducing its overall exposure to fossil fuels and non-renewable utilities. The plans involved merely making limited adjustments to its portfolio within those sectors.
According to the NEF-led study, the result is that the carbon intensity of the CPBS is set to decline by a mere 7% in 2022. It may even struggle to meet the 25% target the BoE has set for 2025, a goal already deemed too modest by climate advocates. Meanwhile, the proportion of carbon intensive holdings remains virtually the same at 54%.
The paper offers a series of proposals it says would help the BoE “genuinely lead by example” on the decarbonisation of monetary policy. These include beginning to exclude fossil fuel companies and applying a stronger tilt to its portfolio. The authors say combining both options would reduce the carbon intensity of the CBPS by 39%, as well as the proportion of carbon-intensive bonds by nearly a third from 54% to 36%.
According to the report, this would also have a powerful signalling effect and help create a much-needed pressure on polluting companies to take decisive climate action as soon as possible. It adds that the BoE’s approach to assessing the climate performance of bond issuers is likely to be used as a benchmark by other central banks around the globe.
The European Central Bank has said it is developing proposals to include climate considerations in the framework for its own corporate bond purchase programme, which it will publish by the middle of this year.
This page was last updated January 13, 2022
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