BoE unveils plan to ‘green’ its corporate bond-buying

The Bank of England has unveiled several tools designed to make its corporate bond holdings greener and encourage a transition to net-zero carbon emissions.

The BoE described the measures as a “first step” towards delivering on its mandate to support the UK’s transition to net zero, subject to meeting its inflation target.

In a discussion paper, the central bank outlines four tools it proposes using to “green” its bond holdings: portfolio targets; asset eligibility; “tilting” purchases; and escalating requirements over time.

The BoE says it sees “clear benefits” to setting and disclosing interim targets for “certain climate properties” relating to its corporate bond holdings. As the market for green bonds grows, the central bank will also purchase eligible green corporate bonds.

Purchases may be made contingent on certain “climate-related actions by issuers”. The BoE says this could include mandatory climate disclosures, adding it will examine the case for “selectively excluding issuers” involved in activities “judged incompatible” with the transition to net zero.

The “tilt” strategy will see the BoE rebalance its purchases in favour of issuers that have a “stronger relative performance on meeting climate goals”. It said its purchases will aim “to take account of past and credible prospective improvements”.

Lastly, the framework is designed to “escalate” in stringency over time, with “repercussions” for issuers who do not meet the requirements. “Steeper tilts, removal of eligibility, or future sales of bonds could all be possible responses for issuers whose climate performance does not follow a credible net zero path,” the BoE says.

The BoE’S corporate bond purchase programme is relatively small in size, at £20 billion ($28.3 billion), worth around 6.5% of the sterling corporate bond market. As it is tied to monetary policy objectives, the BoE says it does not expect the holdings to be permanent.

“But we hope that, by working collectively, both with those already involved and those persuaded to do so by our lead, our influence can reach beyond those limitations and help play a part in supporting transition to net zero,” said BoE executive director for markets Andrew Hauser.

Steeper tilts, removal of eligibility, or future sales of bonds could all be possible responses for issuers whose climate performance does not follow a credible net zero path

Bank of England paper

Hauser acknowledged that some people would probably view the framework as “too timid”, while others may argue it goes too far. “Our draft framework already draws heavily on emerging best practice,” he said at the launch of the framework today (May 21). “But today marks the start of an intensive period of listening and learning.”

The consultation will be open to comments until July 2. The BoE will hold virtual events in the coming weeks to “facilitate discussion”, and it plans to implement the changes to the portfolio later this year.

Hauser said the only times there had been a significant decline in greenhouse gas emissions were around crises, such as Covid-19, the Great Depression and the Second World War. This highlighted the need to start early on an “orderly transition”, he said, which would require central banks to be involved, as well as forcing governments to make “hard political choices”.

“Orderly transition requires concerted efforts across every sector and country in the global economy,” he said. “Start late, and the best case is severe economic disruption, at least as bad as in 2008–9.”

Hauser explained that the BoE was intending to incentivise change through its portfolio design, rather than moving straight to decarbonisation. “Indiscriminate ‘portfolio decarbonisation’ of this kind cannot be the best strategy for investors like the Bank seeking to incentivise economy-wide transition to net zero,” he said.

He argued high-emissions firms are the ones that most need to change their ways. Selling these assets does not destroy them, Hauser said, but rather transfers them to other investors. Furthermore, selling the bonds of any firm with a high carbon footprint will penalise those with credible plans to cut emissions.