Bank of England to refocus corporate bonds on greener companies

The Bank of England has set out plans to refocus its £20bn holdings of corporate bonds on greener companies, as part of its new remit to support the UK’s transition to net zero emissions.

The central bank said that in future, companies would need to meet climate-related criteria for their bonds to be included in its asset purchase programme, with purchases increasingly “tilted” towards the stronger performers in their sectors.

Companies would be assessed against the emissions intensity of their activities; progress in cutting emissions; having published a climate disclosure; and having a target to cut emissions — with the BoE increasing its requirements over time, and keeping the option to divest holdings of weak performers.

The BoE will remain willing in principle to invest in fossil fuel companies, although those engaged in coal mining and most of those using thermal coal in their activities will be excluded.

Andrew Bailey, the BoE governor, defended this approach, saying that incentivising companies to change their approach was “more powerful than immediate divestment to encourage the significant shifts in behaviour required across the economy”.

But the BoE drew criticism for not going further. David Barmes, senior economist at the campaign group Positive Money, argued that the central bank should have excluded oil companies, as well as coal, from its purchases and included all emissions in a company’s value chain in its assessment.

“The Bank of England still thinks it can ‘incentivise’ fossil fuel companies to change course with its relatively small holdings of corporate bonds. The bank will have a much stronger impact in guiding markets to net zero if it leads by example and proactively excludes from its portfolio companies deriving revenue from further expansion and exploration of fossil fuels,” he said.

The BoE began buying corporate bonds in 2016 as part of its quantitative easing programme. While its target for the stock of corporate bond holdings remains unchanged, it will still buy bonds to replace those that mature, with the next operation starting this month.

However, corporate debt makes up only a small part of its overall holdings, which consist overwhelmingly of government bonds. The BoE said it would be likely to wind the scheme down when economic conditions allowed and did not expect to be a “permanent investor”.

This means the direct effect of the new policy will be limited; campaigners say that a more significant step would be for the BoE to start taking climate considerations into account when it sets regulatory capital requirements.

But Lukasz Krebel, economist at the New Economics Foundation, a think-tank, said the BoE’s decision still had “an important signalling effect for the market”, as being eligible for its asset purchase programme tended to lower a company’s borrowing costs overall.

The European Central Bank is also considering ditching the principle of “market neutrality” in the corporate bond purchases it makes, in order to incorporate climate criteria — and is looking at a similar approach that would “tilt” purchases depending on companies’ commitment to climate goals.