Bank of England corporate bond purchase 'must align with Paris Agreement goals'

The cross-party Environmental Audit Committee first commended the work which the Bank of England has done highlighting the financial risks from climate change in recent years, and in becoming the first central bank to publish its own climate-related financial disclosure. The committee urged the Bank to "show continued leadership" in this area ahead of the COP26 United Nations Climate Change Conference in Glasgow in November 2021.

The committee, in a letter to Bank of England governor Andrew Bailey (2-page / 123KB PDF), said that the central bank much stop purchasing high-carbon bonds and providing finance to companies in high-carbon sectors without placing any conditions on them to make a transition to 'net zero'.

The committee also said that, in future, the Bank of England should require large companies receiving taxpayer support through the Covid Corporate Financing Facility (CCFF) to publish climate-related financial disclosures in line with recommendations of the international Taskforce on Climate-related Financial Disclosures (TCFD) and the Government's Green Finance Strategy. In addition, the Bank of England should write to all companies that have already received CCFF funding to remind them that the Green Finance Strategy expects to see all listed companies and large asset owners publish disclosures by 2022, the committee said.

Committee chair Philip Dunne said: "We are calling on the Bank to show leadership, once again on climate change, in the year the UK hosts COP26, by ensuring its actions to promote recovery also reduce the UK's exposure to climate change risk".

"It has a moral responsibility to align its corporate bond purchasing programme with the goals of the Paris Agreement; and it should require companies receiving millions of pounds of taxpayers' money to publish climate-related financial disclosures," he said.

In a statement in response, the Bank of England said that climate change was a "strategic priority" for the Bank, and that it would respond in full to the letter in due course.

"As the governor told the Treasury Select Committee in November, work to consider how best to take account of climate considerations in our corporate bond portfolio is already underway at the Bank," the statement said. "The CCFF scheme closed to new applications on 31 December, and will close to new borrowing in March - with all borrowings due for repayment by March 2022."

The 2015 Paris Agreement on Climate Change set global goals to reach net zero carbon  emissions and limit global warming to 1.5 degrees Celsius. The Bank of England's corporate bond purchasing programme is currently aligned with a 3.5 degree temperature rise by 2100, according to the Environmental Audit Committee.

Financial services expert Sharon Smith of Pinsent Masons, the law firm behind Out-Law, said: "The Environmental Audit Committee's letter to the Bank of England evidences not only the pressure on the Bank to align its corporate bond purchase programme with Paris Agreement goals, but also the continuing and increasing pressure on companies to provide climate-related disclosures in line with TCFD recommendations".

"Companies in hard-to-abate carbon intensive sectors with a strategy to transition to greener business activities may wish to issue climate transition-style bonds going forwards, with disclosures in line with ICMA's Climate Transition Finance Handbook," she said.

The International Capital Market Association (ICMA) Climate Transition Finance Handbook, published in December 2020, is designed to support those raising funds on the debt capital markets for climate transition-related purposes. The handbook provides guidance for issuers, particularly those in carbon intensive industries, on the disclosures they will need to make to access debt capital markets finance to make the transition to greener business activities.