On May 21st 2021, the Bank of England published a consultation paper on “Options for greening” its corporate sector purchases scheme (CBPS). This paper intends to define how the Bank will decarbonize its purchases, a move announced in 2020 and confirmed in March 2021 when the mandate of the Bank was updated to include climate action. If the CBPS program is small – about 20 billion pounds – this process will set the basis of the Bank of England’s climate approach and is likely to influence other central banks that have been considering similar measures, such as the European Central Bank (ECB). While the Bank of England’s approach is interesting, we identified several flaws that ought to be corrected.
From May 21st to July 2nd 2021, the Bank of England has opened a consultation on “options for greening” its Corporate Bond Purchase Scheme (CBPS). The Bank will implement its new approach on the matter in Q4 2021.
A “greening” approach based on three principles
The approach laid out by the Bank of England in its paper rely on three principles:
- “Incentivize companies to take decisive action to achieve net zero”: Although exclusions and divestments could be a part of the Bank’s toolkit, it intends to push companies to align with net zero by prioritizing engagement. Divestment is mainly presented as a threat if companies do not adapt over time.
- “Lead by example, learn from others”: The Bank hopes to learn from investors that have already developed their own net-zero strategies and to see his own approach be used by investors.
- “Ratchet up our requirements over time”: The Bank’s policies will not remain static over time. The Bank will first establish minimum requirements, and then evolve these requirements over time.
While these principles seem, on the whole, appropriate, several of their features risk severely weakening the Bank of England’s approach.
Engagement timeline and requirements remain unclear
To engage with companies, the Bank must set ambitious eligibility requirements. Engagement strategies should especially be linked to clear deadlines and – if not successful – result in divestment. To monitor company progress, the bank should require short term targets (two and five years), and not only long-term ones. The Bank should consider setting more ambitious requirements and timelines for any of the more carbon intensive companies that are not excluded from its purchases.
Furthermore, effective engagement requires a lot of resource and it is not clear that the bank has the capacity and tools to assert effective pressure on companies through engagement. The Bank should precisely describe the tools it intends to use and the internal resources that would be devoted to engaging with companies and following their climate plans.
An over-reliance on engagement
By excluding and divesting, the Bank will send a strong signal to other investors, as well as companies and consumers. Yet, the Bank of England overlooks its responsibility to set an example and the effectiveness of divestment strategies. Moreover, as underlined above, the Bank seems to significantly over-estimate its ability to influence companies via engagement. Considering that only a tiny number of companies are already aligned with a 1.5C trajectory, it must not hesitate to exclude and divest from the activities that are at odds with the transition and companies that are unwilling to transition.
Fossil fuel exclusions would also help the Bank reduce its exposure to climate-related risks. This is even more true for new projects, that risk being closed before they have been amortized.
If the Bank clearly identifies coal as one sector to be divested from, it seems to leave out other fossil fuels. However, there is a very strong case for oil and gas exclusions too. The International Energy Agency (IEA) highlights that new exploration and production of fossil fuels beyond what has already been committed to in 2021 is incompatible with the net-zero goal. The UN Production Gap report – referenced in the Bank’s paper – indicates that global fossil fuel production should fall by 6% each year from 2020 to 2030 to get on a 1.5°C track.
Therefore, the Bank of England should exclude companies:
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Who are involved in any new fossil fuel projects, or;
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For whom the majority of revenues are derived from any fossil fuel activities, or;
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Who are significantly involved in coal or unconventional oil and gas.
Considering all emissions and setting the right targets
The Bank seems overly cautious on the accounting of scope 3 emissions. These emissions account for a very significant – and sometimes overwhelming – share of GHG emissions and should be integrated as soon as possible. For any carbon intensive activity – including in the fossil fuel sector -, scope 3 emissions should be considered immediately. This is also true for the finance sector, where – as the Carbon Disclosure Program have showed – scope 3 emissions would be about 700 greater than scope 1 and 2 emissions.
When monitoring its own climate progress, the Bank should set an ambitious and short-term target for assets to be fully aligned with the transition. Point-in-time absolute emissions and intensity targets should be used as annual objectives, while broader alignment target – such as temperature rise – should be defined for the short and medium term.
By greening its corporate purchases, the Bank of England could set an example to be followed by major central banks across the world. However, its current approach is too reliant on engagement and too lenient with fossil fuels. We call on the Bank of England to correct these flaws, thus establishing a strong basis for the European Central Bank (ECB) and others to emulate.