{"id":13373,"date":"2021-06-28T12:00:03","date_gmt":"2021-06-28T10:00:03","guid":{"rendered":"https:\/\/reclaimfinance.org\/site\/?p=13373"},"modified":"2023-02-08T16:22:29","modified_gmt":"2023-02-08T15:22:29","slug":"bank-of-england-is-greening-its-corporate-asset-purchases-a-reference-approach","status":"publish","type":"post","link":"https:\/\/reclaimfinance.org\/site\/en\/2021\/06\/28\/bank-of-england-is-greening-its-corporate-asset-purchases-a-reference-approach\/","title":{"rendered":"Bank of England is \u2018greening\u2019 its corporate asset purchases: a reference approach?"},"content":{"rendered":"

On May 21<\/span><\/b>st<\/span><\/b> 2021, the Bank of England published a consultation paper on \u201c<\/span><\/b>Options for greening<\/span><\/b><\/a><\/u>\u201d its corporate sector purchases scheme (CBPS). This paper intends to define how the Bank will decarbonize its purchases, a move announced <\/span><\/b>in 2020<\/span><\/b><\/a><\/u> and confirmed in March 2021 when the mandate of the Bank was <\/span><\/b>updated<\/span><\/b><\/a><\/u> to include climate action. If the CBPS program is small \u2013 about 20 billion pounds \u2013 this process will set the basis of the Bank of England\u2019s 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\u2019s approach is interesting, we identified <\/span><\/b>several flaws<\/span><\/b><\/a><\/u> that ought to be corrected.<\/span><\/b><\/p>\n<\/div>

From May 21<\/span>st<\/span> to July 2<\/span>nd<\/span> 2021, the Bank of England has opened a consultation on \u201coptions for greening\u201d its Corporate Bond Purchase Scheme (CBPS). The Bank will implement its new approach on the matter in Q4 2021. <\/span><\/p>\n<\/div><\/div><\/div>

<\/div><\/div><\/span>

A \u201cgreening\u201d approach based on three principles<\/span><\/b>\u00a0<\/span><\/h1><\/span>
<\/div><\/div><\/div>

The approach laid out by the Bank of England in its paper rely on three principles:<\/span><\/p>\n

\n
    \n
  1. \u201c<\/span>Incentivize<\/span> companies to take decisive action to achieve net zero<\/span><\/strong>\u201d<\/strong>:<\/span><\/span> Although exclusions and divestments could be a part of the Bank\u2019s 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.<\/span><\/li>\n
  2. \u201c<\/span>Lead by example, learn from others<\/span>\u201d: <\/span><\/span><\/strong>The<\/span> Bank hopes <\/span>to<\/span> learn from investors that have already developed their own net-zero strategies<\/span> and to see his own approach be used by<\/span> investors.<\/span><\/span><\/span><\/span><\/li>\n
  3. \u201c<\/span>Ratchet up our requirements over time<\/span>\u201d: <\/span><\/span><\/strong><\/strong>The Bank\u2019s policies will not remain static over time. The Bank will first establish minimum requirements, and then evolve these requirements over time.<\/span>
    \n<\/span><\/span><\/strong><\/li>\n<\/ol>\n<\/div>\n

    While these principles seem, on the whole, appropriate, several of their features risk severely weakening the Bank of England\u2019s approach.<\/span><\/p>\n<\/div>

    <\/div><\/div><\/span>

    Engagement timeline and requirements remain unclear<\/span><\/b>\u00a0<\/span><\/h2><\/span>
    <\/div><\/div><\/div>

    To engage with companies, the Bank must set ambitious eligibility requirements. <\/span>Engagement strategies should especially be linked to clear deadlines and \u2013 if not successful – result in divestment<\/span><\/b>. To monitor company progress, the bank should <\/span>require short term targets<\/span><\/b> (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. <\/span><\/p>\n

    Furthermore, e<\/span>ffective engagement requires a lot of resource<\/span> <\/b>and<\/span> it is not clear that the bank has the capacity and tools to assert effective pressure on companies through engagement<\/span><\/b>. 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.<\/span><\/p>\n<\/div>

    <\/div><\/div><\/span>

    An over-reliance on engagement<\/span><\/b>\u00a0<\/span><\/h2><\/span>
    <\/div><\/div><\/div>

    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, t<\/span>he Bank seems to significantly <\/span>over-estimate its ability to influence companies via engagement<\/span><\/b>. Considering that only a tiny number of companies are already aligned with a 1.5C trajectory, <\/span>it <\/span>must not hesitate to exclude and divest from the activities that are at odds with the transition and companies that are unwilling to transition<\/span><\/b>. <\/span><\/p>\n

    Fossil fuel exclusions would also help the Bank reduce its exposure to climate-related risks<\/span><\/b>. This is even more true for new projects, that risk being closed before they have been amortized. <\/span><\/p>\n

    If the Bank clearly identifies coal as one sector to be divested from, it seems to leave out other fossil fuels. However, <\/span>there is a very strong case for oil and gas exclusions too<\/span><\/b>. The International Energy Agency (IEA) <\/span>highlights<\/span><\/a><\/u> 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 <\/span>UN Production Gap<\/span><\/a><\/u> report \u2013 referenced in the Bank\u2019s paper – indicates that global fossil fuel production should fall by 6% each year from 2020 to 2030 to get on a 1.5\u00b0C track. <\/span><\/p>\n

    Therefore, <\/span>the Bank of England should exclude companies:<\/span><\/b><\/p>\n