BoE considering green conditionality for corporate bond-buying

The Bank of England may add environmental criteria to its corporate bond purchase facility’s eligibility requirements, one of its executive directors told lawmakers.

Sarah Breeden told a parliamentary committee that the BoE will also discuss with the UK Treasury whether it should add a green element to its mandate. Breeden oversees the BoE’s work on climate change.

“That is exactly what we are considering in relation to our corporate bond purchases,” she said. “In the context of the long-term investments we are making, that is the sort of condition we are discussing internally and will with [the Treasury] discuss how we could incorporate that in our remit.”

The hearing of the Environmental Audit Committee on September 23 took evidence from activists from climate NGOs as well as Breeden. Fran Boait, executive director of Positive Money, and Maria-Krystyna Duval, head of climate at ClientEarth, both argued the Covid crisis presents an opportunity to shift the economy to a more sustainable long-term model.

Members of parliament also questioned a group of corporate chief executives. Some of them admitted to taking government support, laying off workers, and then continuing to pay dividends to their shareholders.

Government loans to large firms were administered by the BoE under the Covid Corporate Financing Facility, or CCFF. Caroline Lucas, the UK’s sole Green Party MP, asked Breeden why there wasn’t tougher conditionality on the facility, in terms of dividend curbs, worker retention and green issues.

Breeden said the BoE was simply the Treasury’s agent so it had relatively little say in the design of the facility. But she argued the facility, which was launched on March 17 near the peak of the UK’s Covid-19 outbreak, had to be designed with speed and size in mind rather than strict conditionality.

“The shared aim across Treasury and bank was for [the Covid facilities] to be big, broad and fast, getting the money to the companies that needed it,” Breeden said. “In that context, putting conditionality about [climate] disclosure would have frustrated that underlying objective.”

Breeden said that since the CCFF will be closed down in the next six months and was intended as short-term bridge finance, it did not seem be the right vehicle to “drive the multi-year transition that I absolutely agree our economy needs”.

But she said adding green criteria to other parts of the BoE’s balance sheet, namely the corporate bond purchases, was under active consideration. The BoE has already disclosed that its corporate bond portfolio “mirrors the market” and therefore has weak green credentials.

The companies in the portfolio are associated with an estimated average global temperature increase of 3.5°C, which Breeden noted was “clearly not” aligned with the Paris Agreement on climate change. The agreement aims to keep global temperature increases below 2°C, and ideally 1.5°C.

A challenge for the BoE is that the vast majority of its balance sheet is made up of UK government debt, none of which is rated as green. Breeden said that if the UK government issued green bonds, the BoE would buy some.

She also cautioned against exclusionary approaches to greening the central bank’s asset purchases – for instance, cutting out fossil fuels. Breeden argued that green criteria need to be applied across all industries and with a view to future emissions. A fossil fuel company with a credible emissions reduction plan is clearly better than one that plans to continue emitting, she said.