Corporate bonds

Bank of England to refocus corporate bonds on greener companies

The Bank of England has plans to refocus its £ 20 billion corporate bonds on greener companies, as part of its new mandate to support the UK’s transition to net zero issuance.

The central bank has said that in the future, companies will need to meet climate-related criteria for their bonds to be included in its asset purchase program, with purchases increasingly “slanted” towards assets. more efficient in their sectors.

Companies would be assessed on the basis of the emissions intensity of their activities; progress in reducing emissions; have issued a climate statement; and have an emissions reduction target – with the BoE increasing its demands over time and retaining the ability to sell off the less performing holdings.

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

Andrew Bailey, the BoE governor, defended the approach, saying that pushing companies to change their approach was “more powerful than immediate divestment in spurring the significant behavioral changes required across the economy. “.

But the BoE has drawn criticism for not going any further. David Barmes, senior economist for 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 Evaluation.

“The Bank of England still believes it can ‘get’ 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 towards net zero if it leads by example and proactively excludes from its portfolio companies deriving income from expansion and exploration of fossil fuels, ”he added. he declared.

The BoE started buying corporate bonds in 2016 as part of its quantitative easing program. While its corporate bond stock target remains unchanged, it will still buy bonds to replace maturing ones, with the next trade starting this month.

However, corporate debt represents only a small portion of its overall holdings, which are mostly made up of government bonds. The BoE said it would likely end the program when economic conditions permitted and did not expect to be a “permanent investor”.

This means that the direct effect of the new policy will be limited; Campaigners say a bigger step would be for the BoE to start taking climate considerations into account when setting regulatory capital requirements.

But Lukasz Krebel, an economist at the New Economics Foundation, a think tank, said the BoE’s move still had “a strong signaling effect for the market” because being eligible for its asset purchase program had tend to reduce a company’s borrowing costs overall.

The European Central Bank is also considering abandoning the principle of “market neutrality” in the purchases of corporate bonds it makes, in order to incorporate climatic criteria – and is considering a similar approach which would “tilt” the purchases. depending on the companies’ commitment to the climate. goals.