BOE to green its corporate bond-buying program

Bloomberg

The Bank of England (BOE) signalled it will take account of the government’s environmental goals in buying assets in financial markets, saying it will shift purchases toward companies doing the most to fight
climate change.
The move is part of a global effort by central banks to push the financial services industry towards greener finance. The BOE stopped short of plans to divest bonds issued by big polluters, saying that would be in effect washing its hands of the issue.
The UK central bank will consult the industry on how it will implement the changes. That will affect any future purchases and reinvestments under its $28 billion Corporate Bond Purchase Scheme, one of the emergency measures put in place to stimulate the economy during the coronavirus crisis.
“We propose to tilt future CBPS purchases towards issuers which are performing relatively strongly in support of net zero, and away from those that are not,” the BOE’s Executive Director for Markets Andrew Hauser said at an event at Bloomberg in London.
The BOE hope to announce the plan before the next round of reinvestments, due in the fourth quarter.
It marks the bank’s first major decision since March, when Chancellor of the Exchequer Rishi Sunak asked policy makers to include green targets in their deliberations.
Hauser said the move is clearly within remit of the Monetary Policy Committee under Sunak’s mandate. It also similar to efforts European Central Bank Board Members Isabel Schnabel and Frank Elderson set out in a podcast on May 12.
Until now, the BOE has sought to preserve the stability of the corporate bond market by making purchases across sectors. Debt issuances skews towards more polluting sectors — like electricity and natural gas companies — that on average have bigger long-term capital needs that work well with bond markets.
“There are increasingly persuasive reasons to believe that financial markets are materially underpricing the cost of emissions, and hence climate risks,” Hauser said.
He also indicated that adjusting the program to reflect green targets doesn’t necessarily mean the BOE will sell bonds.
“Indiscriminate ‘portfolio decarbonisation’” would not be an effective measure because “the high-emissions firms whose bonds we would be selling are the ones we most need to be at the vanguard of emissions reduction,” Hauser said.
Engaging with those firms, and taking into account their plans to reduce emissions is a better measure to persuade them to act on the environment, he said.
“Divestment is a powerful tool, and should remain squarely in the toolkit,” he said. “But it should be used as a credible
threat to reinforce incentives, not an indiscriminate ‘quick fix.’ It isn’t in our minds to declare everything that has a carbon footprint of over X, because doing so is likely to be counter-productive.”
The aim of the program is to improve incentives for companies and financial services to invest in meeting net-zero targets, going beyond measures encouraging them to minimize their carbon footprints.