BoE told to support oil and gas

The UK chancellor, Rishi Sunak, has instructed the Bank of England (BoE) and other financial regulators to consider the government’s commitment to continued investment in the oil and gas sectors when carrying out their responsibilities.

He issued the direction in letters that coincided with the release of the government’s new energy security strategy. The letters, almost identical in their formulation, were sent to the BoE’s financial policy (FPC) and prudential regulation committees, and to the Financial Conduct Authority.

“Where practical and relevant, the [FPC] should have regard to the government’s energy security strategy and the important role that the financial system will play in supporting the UK’s energy security – including through investment in transitional hydrocarbons like gas – as part of the UK’s pathway to net zero,” Sunak wrote.

The instruction comes just a year after the government tasked the same regulators, as well as the BoE’s monetary policy committee (MPC) with supporting the government’s net-zero goal. The bank subsequently overhauled its corporate bond purchase scheme to favour climate-friendly companies, saying it was required to do so by the MPC’s new mandate.

It is unclear what the chancellor’s new instruction may mean in practice, but climate advocates have warned that the reference to fossil fuel investments may come into conflict with the regulators’ duty to support net zero. The regulators have several important climate-related initiatives underway, including the second round of the BoE’s biennial climate exploratory scenario exercise, the introduction of a new green taxonomy and a review looking into climate-adjusted capital requirements.

In the case of capital requirements, groups such as Finance Watch have warned that financing and insuring fossil fuel projects is currently artificially cheap, because the capital framework does not accurately account for the risks and costs associated with them. The group has called on regulators to correct this by requiring lenders to internalise more of the costs themselves – a move that would likely stem the flow of finance to those sectors.

Far from watering down regulators’ net-zero remit, civil society groups such as Client Earth have argued for it to be strengthened. In a submission to a recent government consultation on the future of UK financial regulation, the environmental law charity called for the BoE and FCA to be given a statutory objective requiring them to help ensure all of the UK’s commitments in relation to climate change are met.

It said that doing so would allow regulators to commit sufficient resources to climate matters and allow them to act quickly, without waiting for parliament to pass new legislation.

“A climate objective would therefore assist regulators in providing the necessary resources to climate issues across all areas of supervision and enforcement,” the group stated.

The Treasury said that its new recommendations to the regulators are intended to supplement rather than replace the recommendations made last year, which included the reference to net zero. The regulators are required to respond to the government, setting out any action they are taking, or to give an explanation if they have opted not to do so.