Report: BoE is subsidising fossil fuel companies

February 28, 2024|Written by Moriah Costa|Bank of England

The Bank of England (BoE) is inadvertently subsidising fossil fuel companies by accepting assets from financial firms as collateral against loans, a report from research group Positive Money has found.

The central bank supplies reserves for financial institutions through several ways, including short and long-term lending facilities. These programmes allow participants to borrow reserves in exchange for collateral, such as bonds and debt issued by corporations.

Positive Money estimates that the BoE has allocated £165bn to lenders since 2014 through one of these schemes, the indexed long-term repo facility.

The report found that some of the bonds that are accepted by the BoE include oil companies Shell and TotalEnergies, coal producer BHP Group and mining giant Rio Tinto.

This ultimately gives these sectors a “hidden subsidy”, said Ellie McLaughlin, a senior policy and advocacy officer at Positive Money.

Assets that are accepted by central banks tend to have a price increase and lower yields as a result of greater demand. In the EU, a study found that assets eligible as collateral resulted in a seven basis point reduction in yields for the issuers’ new loans.

Ultimately, “public money is being used to prop up an industry detrimental to our future on this planet” and “doesn’t account for potential risks that fossil fuel holdings present,” McLaughlin said.

The paper says that subsidising fossil fuel companies in this way goes against both the BoE’s main mandate of maintaining financial stability but also contradicts its mandate of supporting the UK government’s goal of reaching net zero by 2050.

While the financial risk from climate change is one of its core priorities, BoE governor Andrew Bailey told a parliamentary committee that the central bank had reduced its climate-related resources following the removal of climate change from the BoE’s list of priorities by chancellor Jeremy Hunt in his annual remit letter to the central bank’s financial policy committee.

The report says the BoE should green its collateral framework by developing a science-based framework to assess the environmental footprints of assets. It also recommends screening for and excluding issuers whose main activity is incompatible with climate goals, such as fossil fuel companies. And the BoE should vary its haircuts to assets depending on the issuer’s environmental footprint, as well as increase transparency over its collateral operations.

“Excluding the most environmentally damaging assets, starting with fossil fuels, from this lending framework is the only way for the Bank of England to meet its responsibilities of maintaining financial stability and supporting the transition to net zero,” said McLaughlin.

The BoE declined to comment.

This page was last updated February 29, 2024

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