Transition plans key to navigating net zero ‘tightrope’, says BoE

The path to aligning the financial sector with the UK’s net-zero commitment is like a “tightrope”, a top Bank of England (BoE) official has warned.

Sarah Breeden, director of banking supervision, said that instead of divesting from polluting firms across the board, financial institutions should instead focus on scrutinising firms’ green transition plans, and stewarding them towards their goals.

Breedon used a speech in the City of London to lay out a series of potential pitfalls faced by the financial sector as the transition gains momentum. Among these is the possibility that by decarbonising their portfolios, banks may inadvertently push polluters to seek finance outside of the mainstream banking system, where their activities would be subject to even less transparency and oversight.

This is increasingly a topic of concern for global regulators. Caroline Crenshaw, a commissioner at the US Securities and Exchange Commission, said in December that her agency was working to ensure high-carbon emitters did not find relative safe haven in areas of “least resistance and lowest cost”, but that it may not have the powers to do so without additional action by Congress.

Experts have coined the term “brown-spinning” to describe an exercise whereby firms sell off the highest-emitting components of their businesses to private equity and hedge funds at a discount. Last year, UK academics called for regulators to toughen the regulation of fossil fuel financing in both the bank and non-bank finance sectors.

Breeden also warned that if banks cut off the supply of credit to carbon-intensive energy companies before replacement renewable sources become available, this may exacerbate the current spike in energy costs, particularly for the most vulnerable. Although she made the speech the same day as the government tasked the BoE with supporting its energy security strategy, including continued investment in oil and gas, she made no reference to this development.

She described the challenge of efficiently allocating capital both to assets that are already green, and those that need greening, as well as “responsibly retiring” those which are not compatible with the transition.

“[Transition plans] will set out what action is being taken to transition or adapt emission intensive assets and activities,” she argued. “That will aid the timely allocation of capital to invest not only in assets that are green now, but also to facilitate the provision of transition finance in support of activities that seek to reduce their impact on the climate over a responsible timeframe.”

The UK’s move towards requiring large companies and financial institutions to publish transition plans has been welcomed by climate groups. However, they have also pointed out that the measure will be insufficient unless it is backed by robust regulation which ensures those plans are credible and penalises firms that fail to stick to them.

Policymakers at the European Central Bank have recently indicated that they will apply capital add-ons to banks found to be misaligned with the goals they have set out.