The Bank of England has set out options for greening its corporate bond purchase scheme (CBPS), proposing that this be guided by principles including to incentive companies to take “decisive” action to achieve net-zero emissions by 2050.
The move follows an update of the monetary policy committee’s remit to confirm that the government’s economic strategy – which the committee is expected to support as a ‘secondary objective’ – includes supporting the transition to a net-zero emissions economy.
The central bank said this remit update meant it now had a mandate to reflect an apparent mispricing of the risks and opportunities associated with the transition to net-zero, and that the change meant it had to review the composition of the CBPS.
It today set out the principles that would guide the “greening” of the CBPS and the tools it might use to incentivise the net-zero transition via the buying programme. It currently stands at some £20bn (€23bn), or 6.5% of the sterling corporate bond market.
Asset eligibility is one of four key tools BoE proposed to explore, with the central bank saying it saw a role for making eligibility for the CBPS conditional upon companies’ climate-related actions.
The other key tools it is considering are setting and disclosing interim climate-related targets for the portfolio, tilting purchases, and designing and implementing an escalation strategy.
“We will look to incentivise firms to develop, disclose and commit to credible transition plans”
The central bank said exclusions or divestments would be part of its toolkit, but only where they incentivised a change in bond issuer behaviour in ways that supported orderly transition to net-zero by 2050.
“We will look to incentivise firms to develop, disclose and commit to credible transition plans,” it said. “And we will recognise improvements in climate impact over time rather than responding only to current emissions.”
The central bank also said its work on the CBPS would be guided by the principle to “lead by example, learn from others” and that it would ratchet up its requirements over time.
“As data and metrics on transition pathways and firm-level emissions improve, and issuers have the opportunity to develop credible net-zero strategies, our approach will become progressively more demanding, setting higher expectations and sharper incentives,” it said.
BoE is seeking feedback on the principles and tools it set out. It said that with thinking on “climate conscious investing developing rapidly, we are keen to hear from a wide range of respondents” on the proposals and questions posed in its discussion paper.
The deadline for comments is Friday, 2 July. The discussion paper can be found here.