Facilitating the Transition to Net Zero and Institutional Change at the Bank of England

In March 2021, the Bank of England’s monetary policy committee received a new mandate to “facilitate the transition to net zero”. In this paper, political economists James Jackson and Daniel Bailey discuss the mixed reactions from the BoE and the British state.

The authors find that while the new environmental remit validated the bank’s ongoing work to assess climate risks, it has not catalysed the bold change to monetary policy needed to meet net zero targets.

The analysis of bank documents and interviews with high-ranking Treasury officials and monetary policy experts shows that the new mandate has been interpreted in a “distinctly conservative” way. The authors characterise the bank’s climate actions since 2021 as primarily prudential, stopping short of the precautionary action commensurate with the scale of risks.

According to the authors, the BoE has eschewed “any significant leadership role” in promoting decarbonisation through monetary policy. Instead, it has remained mostly limited to petitioning financial institutions to disclose their exposures and subjecting them to climate stress testing.

Far from being “distracted” by environmental concerns, an accusation levelled at the BoE by some, the authors find that climate concerns have been largely siloed to the financial policy committee which is responsible for assessing and monitoring systemic financial risks.

The analysis also reveals a rigid hierarchy of objectives which positions the climate mandate as subservient to, and in conflict with, price stability – despite indications that current inflation rates “are linked to fossil fuel energy prices”. According to the authors, climate concerns are a “much lower priority” and, in the minds of some bank actors, not a “real mandate”.

The authors identify a fear within the bank of the “potentially destabilising effects of private capital realignment during a net-zero transition”. Bank officials often frame the net-zero mandate as a balancing act between medium-term climate risks and short-term financial instability.  Yet the authors say the bank’s approach is “unbalanced” and set to “fall off the tightrope”. Indeed, according to the bank’s own scenario analysis, it is on a “late action” trajectory.

The bank has identified the incremental tilting of its corporate bond purchasing scheme away from unsustainable economic activity as “the primary monetary tool for facilitating net zero”. A strategy borne of the perceived need to balance dual sources of potential instability.

Though this tilting will have a signalling effect, the authors highlight debates over its effectiveness, including one interviewee who claimed it is like “trying to empty a swimming pool with a mug”. As the authors explain, the CBPS is a “relatively meagre” scheme – covering just 2% of the bank’s £895bn holdings – and is governed by principles of market neutrality.

Finally, the authors note that despite its modest action, the BoE is increasingly sensitive to climate risks and many bank actors are seeking creative solutions within their existing responsibilities. However, they argue that they are curtailed by the structural logic of the bank which shows “little indication” that it will significantly alter monetary policy in the near future.