On November 5th 2021, the Bank of England (BoE) published its rationale for greening its corporate sector purchases scheme (CBPS). If the CBPS program is small – about 20 billion pounds – this measure sets 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). Unfortunately, while the Bank of England’s approach would contribute to a Paris-aligned phase-out of coal, it falls short on several fronts, notably by failing to oppose fossil fuel development and to cover all greenhouse gas (GHG) emissions.

In May 2021, the BoE published a consultation paper on “Options for greening” its CBPS. This paper was a draft of the bank’s approach to decarbonize its corporate asset purchases, a move first announced  in 2020  and confirmed in March 2021 when the mandate of the Bank was updated to include climate action. On November 5th 2021, the BoE published the final version of this approach.

The BoE approach relies on three things: 1) targets at the portfolio level, 2) minimum eligibility criteria to be accepted in the portfolio and 3) a scorecard that aims at progressively tilting the portfolio toward higher environmentally performing companies.

Portfolio targets: forgetting about scope 3

The BoE sets two broad targets for its CBPS:

  1. Achieve “net zero greenhouse gas emissions” by 2050.
  2. “Reduce the Weighted Average Carbon Intensity (WACI) of the CBPS by 25% by 2025”.

These targets have a major flaw: they do not cover all emissions, scope 3 emissions are left out. However, these emissions account for a very significant share of GHG emissions. For any carbon-intensive activity – including in the fossil fuel sector – scope 3 emissions should be considered immediately and are already largely available.

Another weakness of the BoE target lies in the use of a carbon intensity target that could potentially allow for the absolute emissions of the portfolio to increase if its size grow. This target was also calibrated using the NGFS’s net zero scenario that relies on overly optimistic assumptions.

The BoE’s actions in skipping over scope 3 emissions are even more serious, given that it also concerns the scorecard it plans to use to tilt its portfolio: companies won’t be evaluated on how they reduce scope 3 emissions.

Eligibility requirements: coal out, oil and gas in

The BoE sets three eligibility requirements to exclude companies that are deemed clearly incompatible with its two climate targets. To remain eligible to the CBPS, companies must:

  1. Publish a climate disclosure.
  2. For “higher-emitting sectors” (energy, electricity, gas, and water), adopt public emissions reduction targets.
  3. Not be involved in coal mining and thermal coal or – if they are active in thermal coal – meet several strict criteria, including no investment in new unabated thermal coal plants and a commitment to eliminate existing thermal coal activity in the UK by 2025 and globally by 2030.

Concretely, the coal criteria used by the BoE will led it to phase out coal from its CBPS by Paris-aligned dates and represents a strong stand against the most polluting of all fossil fuels. The bank underlines that this coal exclusion is based both on scientific evidence regarding the objective of reaching net zero by 2050 and on UK government policy. The BoE also mentions that it will likely impose “additional restrictions on a wider range of fossil fuel related activities” and that it will “engage with ongoing discussions amongst experts in net zero investing about the appropriate nature of such restrictions, and the timeframes over which they should come into force”.

Using the same justifications that drove it to exclude coal, the BoE should also have excluded companies like Royal Dutch Shell and TotalEnergies that are developing new fossil fuel supply projects and that are not planning to reduce fossil fuel production and cannot wait years to do so.

If the BoE adopts strong coal-related criteria aligned with the Paris Agreement, it leaves major loopholes that allow fossil fuel developers to slip through the net. The bank underlines that this coal exclusion is based both on scientific evidence regarding the objective of reaching net zero by 2050 and on government policy. Using the same criteria, the BoE should also have excluded companies like Royal Dutch Shell and TotalEnergies that are developing new fossil fuel supply projects and that are not planning to reduce fossil fuel production.

The requirement for high-emitting companies to adopt public emission reduction target does not compensate the BoE’s lack of oil and gas exclusion. Indeed, this eligibility requirement is very vague, and the bank does not indicate how it will assess if it is aligned with the Paris Agreement. The bank expects this requirement to “get increasingly stringent” and “will continue to monitor developments” to determine when to require the third-party verification of targets. However, it does not clarify what this verification process will be, nor give any calendar for its implementation. Targets could remain unverified for several years, allowing for all kinds of abuses. Furthermore, emissions targets can still allow companies to develop new fossil fuel projects and can even allow them to grow production when they are based on carbon intensity.

Scorecard and tilting strategy: making it easy for polluters?

The core of the Bank of England’s approach is a “tilting” strategy to progressively shift CBPS purchases toward firms that are “performing relatively strongly in support of net zero” and “away from those who are not”. This strategy is the main tool the bank intends to use to reach its two targets. The BoE base its tilting strategy on a scorecard that ranks companies in several categories depending on whether and how they satisfy a set of four criteria set:

  1. Current carbon intensity, compared to the one of the overall portfolio.
  2. Past change in absolute emissions compared against “transition pathways judged most appropriate for a given sector” or – if such pathways are not available – the NGFS’ “net zero” scenario.
  3. Publishing a climate disclosure.
  4. Publishing emission reduction targets, and eventually having this target verified.

The BoE will progressively tighten these criteria and follow an “escalation ladder” to push companies that are performing poorly to transition. Concretely, the BoE will: 1) tilt purchases away from “weaker climate performers” 2) make these “weaker performers” ineligible for further purchases 3) “if appropriate”, divest existing holdings from “weaker performers”.

However, this escalation process is painfully slow and uncertain: the BoE expects to wait three years to make climate offenders ineligible and five years to divest from them. It can still decide not to follow the escalation process or to further delay it. Besides, the limited size of the CBPS and the lack of a dedicated engagement process at the BoE cast doubt upon the efficiency of this strategy and should have pushed it to adopt stronger eligibility requirements instead.

The scorecard itself suffers from several structural weaknesses:

  • About half of the total scores will be based solely on disclosure requirements, allowing companies with major environmental impact to still rank relatively well. These disclosure criteria are also used to determine companies’ eligibility to the CBPS, and therefore those that satisfy the minimum disclosure requirements will still win points by default.
  • Like for the BoE’s CBPS targets, scope 3 emissions are left out of the emission reduction targets required by the bank or in the analysis of past absolute emissions.
  • The BoE mentions several pathways that it could use to assess how absolute emissions align with the transition. If some of these pathways are ambitious – like the One Earth Climate Model (OECM) sectoral pathways developed with the NZAOA – the BoE can also rely on NGFS pathways that still allow for significant fossil fuel reliance.

To conclude, the Bank of England is failing the climate test but it can still make a comeback. We welcome the fact that the bank took a strong stand on coal and pledged to progressively tighten its criteria to reflect climate science and UK climate policies. However, we can only regret the bank’s lack of coherence in ignoring the need to end fossil fuel development and a significant share of global GHG emissions. We urge the Bank of England to set things right and other central banks – including the European Central Bank (ECB) – to heed these lessons.