Bank of England targets greener corporate bond portfolio
The Bank of England on Friday presented plans to align its Â£ 20 billion ($ 28.4 billion) of corporate bonds in sterling with the government’s goals of achieving net zero carbon emissions.
However, the central bank will not embark on an immediate sale of bonds issued by high carbon companies, such as electric utilities and oil companies, when it begins the rebalancing process later this year. .
âDivestment is a powerful tool and should remain clearly in the toolbox. But it should be used as a credible threat to strengthen incentives, not as a blind ‘quick fix’, said Andrew Hauser, executive director of the BoE for the markets, in a speech moderated by Bloomberg.
The central bank said it would set targets for the overall issuance of its corporate bond holdings, invest in “ green ” corporate bonds as soon as they become available and require bond issuers publish their shows.
The BoE has said it will seek to rebalance its bond holdings to issuers with better climate performance and restrict investment in bonds issued by companies whose operations are widely seen as incompatible with lower carbon emissions.
Issuers with currently high issuance should chart a credible path to reduce issuance or else they will no longer be eligible for bond purchases.
The BoE will focus on a company’s emissions trajectory as well as the absolute level.
âThe precise benchmarking of this approach will be developed in the coming months,â Hauser said. The BoE does not currently buy corporate bonds and the next scheduled reinvestment of maturing bonds is scheduled for the last quarter of 2021.
Hauser said the BoE was the first central bank to take these steps and hoped it would set a direction for the wider market.
Next month, the BoE will âtestâ banks and insurers for their exposure to climate risks.
The BoE doubled its holdings of corporate bonds during last year’s COVID pandemic. To date, the bonds have been chosen to be representative of issuance of pounds sterling by non-financial companies which make a significant contribution to the UK economy.
The BoE owns around 10% of all corporate bonds that meet its eligibility rules. Hauser said the rebalancing would not undermine the BoE’s main goals of targeting 2% inflation and ensuring financial stability.
Bonds recently classified as eligible for purchase include those from energy giant BP (BP.L), mining company Rio Tinto (RIO.L) and German automakers Volkswagen (VOWG_p.DE) and Daimler ( DAIGn.DE).
In March, Finance Minister Rishi Sunak changed the BoE’s political mandate to require it to support the government’s commitment to shift to a net zero carbon economy.
The UK government has paid particular attention to environmental issues this year as it prepares to host the UN COP26 climate summit in Glasgow in November.
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