{"id":9496,"date":"2021-03-08T16:00:24","date_gmt":"2021-03-08T15:00:24","guid":{"rendered":"https:\/\/reclaimfinance.org\/site\/?p=9496"},"modified":"2023-02-28T17:32:53","modified_gmt":"2023-02-28T16:32:53","slug":"bank-of-england-green-mandate-what-does-it-means","status":"publish","type":"post","link":"https:\/\/reclaimfinance.org\/site\/en\/2021\/03\/08\/bank-of-england-green-mandate-what-does-it-means\/","title":{"rendered":"Bank of England\u2019s \u2018green\u2019 mandate: what does it mean?"},"content":{"rendered":"

On March 3<\/span>rd<\/span><\/sup> 2021, Rishi Sunak, the UK Chancellor, <\/span><\/strong>announced<\/a><\/u><\/strong> that the mandate of the Bank of England (BoE) will be changed to explicitly include environmental sustainability and net-zero compatibility. What does this mean? What will the concrete impacts be? And could this help shift the European Central Bank (ECB)?<\/strong><\/p>\n

Bank of England: a new mandate?<\/strong><\/p>\n

Following his announcement<\/a><\/u>, the Chancellor sent two letters to the BoE: one to the Monetary Policy Committee<\/a><\/u> \u2013 handling monetary tools – and the other to the Financial Policy Committee<\/a><\/u> \u2013 in charge of ensuring the stability and resilience of the UK financial system.<\/p>\n

Both letters stress the importance of climate change to the committees\u2019 missions and the Bank of England will have to consider it in its operations: a\/ when conducting its monetary policy; b\/ when monitoring and managing financial risks and c\/ when taking additional measures to further the development of a resilient and sustainable UK financial system.<\/p>\n

More precisely, the BoE\u2019s mandate should now reflect \u201cthe importance of environmental sustainability and the transition to <\/strong>net-zero<\/a><\/u><\/strong>\u201d<\/strong>. This does not change the main monetary objective of the BoE, price stability, which requires it to maintain inflation close to 2%<\/a><\/u>. In short, the BoE will have to consider the UK\u2019s climate and environmental objectives and the overall transition of the UK financial system to net zero when fulfilling its price stability objective<\/strong>.<\/p>\n

In fact, the main consequence of this announcement is to clarify what the BoE and <\/strong>other major central banks<\/a><\/u><\/strong> already recognized: that the fight against climate change is part of their mandate<\/strong>. It is worth noting that the Governor of the Dutch central bank \u2013 Klaas Knot – recently said<\/a><\/u> that \u201ca stable climate can be seen as an important precondition for central banks to be able to deliver on their mandate\u201d. Furthermore, the very same day that Rishi Sunak made his announcement, Isabel Schnabel delivered a speech<\/a><\/u> that emphasized how and why \u201cgreening\u201d the ECB was essential to reach its mandate.<\/p>\n

Of course, the mandate change of the BoE is still a big step<\/a><\/u> in the right direction: it makes it impossible for the BoE and its leaders to avoid action and speeds up the implementation of the related measures<\/strong>.<\/p>\n

What concrete impact?<\/strong><\/p>\n

We already know the first measure that will be taken by the Bank of England. By the fourth quarter of 2021<\/a><\/u>, it will adjust its Corporate Bond Purchase Scheme (CBPS) to account for the climate impact of the issuers.<\/p>\n

This measure was already considered before<\/a> the mandate change, Governor Andrew Bailey<\/a><\/u> clearly stated that it was on the bank\u2019s agenda. It means that the BoE will no longer buy \u2013 and later divest from – bonds issued by big polluters and correct its well-documented<\/a><\/u> carbon bias<\/strong>.<\/p>\n

But the effect of this measure will largely depend on the metric used by the bank to define which companies are \u201cpolluting\u201d. Two things must be considered when choosing this metric:<\/p>\n

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  1. Given that a drastically reducing fossil fuel production is an imperative<\/a><\/u> to limit global warming, companies with fossil fuel expansion plans and\/or that lack a phase-out plan must be excluded<\/strong>. They could be reintegrated if they adopt credible 1.5\u00b0C alignment plans that entail a complete phase-out of fossil fuel-related activities by 2050, something that none of them has done yet.<\/li>\n
  2. The carbon intensity metric often used in studies and promoted by central bankers<\/a><\/u> is insufficient to enable a transition to net-zero. This transition implies a drop in absolute emissions. If carbon intensity can be used in the short term to significantly lower the CBPS\u2019 carbon footprint, it will need to be supplemented with a trajectory of absolute emission reduction<\/strong>.<\/li>\n<\/ol>\n

    Of course, even an ambitious decarbonization of the CBPS will be insufficient to fulfill the BoE\u2019s mandate. The bank should implement several other important measures<\/a><\/u>, notably:<\/p>\n